Recently, numbers from the Reserve Bank of India show that the slowdown in bank credit growth has hurt semi-urban areas the most. The year-on-year growth in bank credit to semi-urban areas fell from 21.9% in December 2007 to 16.9% in December 2008. In contrast, bank credit growth to metropolitan India went up from 21.5% in December 2007 to 25.6% in December 2008.
This rate of growth was even higher, though, at 29.5% in September 2008. But between December 2007 and December 2008, there has been a shift in the allocation of credit from the rural, semi-urban and even the urban areas to the metropolitan cities, as the chart shows. Clearly, the much-vaunted resilience of rural India to the economic downturn has happened in spite of the lack of help from the bankers. From a socio-economic viewpoint, this shift in emphasis by the banks bears out the truth that it’s the weakest and most vulnerable units (who are likely to operate in semi-urban and urban areas rather than the metros) that are hurt the most during a downturn. From the point of view of the banks, however, that’s perfectly natural.
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But there is another and more surprising trend in the growth of bank deposits. While the y-o-y growth rate of bank deposits in rural India has increased from 12.9% in December 2007 to 20.4% in December 2008 and the growth rate in semi-urban India has gone up from 18.4% to 22.5% over the same period, the growth rate of deposits in metropolitan India has decreased.
For the metros, bank deposit growth, which was 27.6% in December 2007, fell to 19.1% in December 2008. This trend seems to show two things: one, increased prosperity in the rural and semi-urban areas—this bears out the rural demand story— and two, the close connection between the growth of deposits in the metros and the state of the stock markets and the financial sector. Lower corporate deposits must also have played a role in the fall in deposit growth in the metros, as cash-strapped companies withdrew funds from banks. Note that this deceleration in deposit growth in the metros occurred throughout the year, which means that it’s not just the result of the credit crunch in the December quarter. The trends clearly show that higher deposit growth in the rural and semi-urban areas is being used for disbursing more credit in the metros.
Which banks have become the most wary of lending? RBI data show that foreign banks’ loans shrank during the December quarter, falling from Rs1,84,713 crore to Rs1,74,920 crore. The y-o-y growth in bank credit for foreign banks fell from 28.5% in December 2007 to 18.1% in December 2008.
On the other hand, the y-o-y growth rate for nationalized banks as well as for State Bank of India and its associates went up, in spite of the deterioration in the economy. For “other scheduled commercial banks” which includes all the private sector banks, loan growth went down from 23.6% y-o-y in December 2007 to 12.3% in December 2008.
That’s partly because growth in deposits for these banks too has fallen sharply, as depositors preferred the safety of state-owned banks. From the viewpoint of bank shareholders, the higher growth rates for the public sector banks are likely to lead to more bad loans, despite the attempts of the central bank to camouflage them through liberalizing the NPA (non-performing assets or bad loans) classification norms.
Graphics by Ahmed Raza Khan / Mint
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