The latest weekly data from the Reserve Bank of India, or RBI, show that bank lending is growing by leaps and bounds, with year-on-year credit growth at 28.5% as on 31 October. In contrast, deposit growth has been much less, at 20.7% year-on-year. In October, while credit growth was Rs1,09,057 crore, deposit growth was Rs73,302 crore, giving an incremental credit-deposit ratio of 149%.
As a result, the credit-deposit ratio of the banks has been steadily rising, from 72.49% at the end of August to 75.43% at the end of October. In fact, the banks have been able to keep up the breakneck pace of growth in credit has been because of RBI’s efforts to reduce the cash reserves held at the central bank. In October, banks’ balances with RBI came down by Rs52,528 crore, making up the shortfall in deposit growth.
Although the data on the impact of the cash reserve ratio (CRR) cut on 3 November is yet to be seen, RBI’s announcement of further measures to enhance liquidity stems from its worry that “the global slowdown is deepening with a larger than originally expected impact on the domestic economy, particularly for the demand conditions in the medium and small industry sector and export-oriented sectors”.
Also See Liquidity Tightens (Graphic)
That credit conditions are still far from normal is seen from the fact that while the three-month Mibor (Mumbai interbank offer rate) rate has come down to 11.5% on Friday from 13.2% at the height of the crunch on 10 October, it remains very high despite all attempts by RBI to infuse liquidity. Global credit conditions have been deteriorating again, with the spread of emerging market bonds over US treasurys, measured by the JPMorgan Emerging Market Bond Index Plus (EMBI+), going up to 670 basis points last Friday after falling to 592 basis points on 10 November. The TED spread, which measures the difference between the yield on three-month US treasurys and the three-month Libor (London interbank offered rate) rate, has gone up a bit. The higher the spread, the greater the risk aversion.
Among the RBI measures, the one on raising rates on NRI deposits has already started having an impact, after rates were raised in mid-September. RBI data show that net inflow into non-resident external rupee accounts was $407 million in September, compared with a net outflow of $211 million in August.
The lower risk weights and provisioning requirements for sectors such as commercial real estate will help banks lend more.
But the question is whether they should, in a deteriorating environment.
What seems to be happening is that because the government does not have much room for a fiscal stimulus, it’s trying to get banks to do the job.
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Graphics by Paras Jain / Mint