Mumbai: Despite the government’s exhortations to the banks to lend more, bank credit continued to contract in the month of January.
Reserve Bank of India data show that outstanding bank credit fell by Rs22,659 crore between 2 January and 30 January. The contraction in non-food credit over the period was Rs13,562 crore.
January is the second month running when bank credit has fallen and the total contraction in non-food credit in the two-month period—28 November 2008 to 30 January 2009—has been Rs80,522 crore.
Also See In Contraction Mode (Graphic)
In sharp contrast, non-food credit increased by Rs27,674 crore over the same period in 2007-08.
As a consequence, the year-on-year growth in credit has come down from 29.8% as on 28 November 2008 to 19.3% on 30 January 2009.
Gaurav Kapur, senior economist at ABN Amro Bank NV in Mumbai, said, “Data from the Purchasing Managers’ Index as well as the industrial production numbers clearly show that the manufacturing sector has been contracting in recent months. The contraction in bank credit reflects that trend.”
He also points out that companies have been destocking and as a result their requirement of working capital to finance inventory has come down.
Moreover, with the deterioration in the economic environment, several bankers have said that management of bad loans has become their top priority.
Indranil Pan, chief economist at Kotak Mahindra Bank Ltd, believes that the pace of decline in credit is likely to come down in future, because part of the fall in the last two months has been caused by oil companies borrowing less from banks, as oil bonds were issued to them.
Pan adds that while bank credit growth will be affected by demand slowdown in the economy, companies may have no alternative but to turn to local banks as repayments on overseas borrowings fall due. This may push up bank credit growth in future.
Deposits with banks, however, have continued to rise, with aggregate deposits going up by Rs19,295 crore over the two months to 30 January 2009. The banks parked these funds in government securities—investment in them went up by Rs66,906 crore between 28 November and 30 January.
Graphics by Sandeep Bhatnagar / Mint