November marked a clear change in the deployment of funds by banks. During the month, banks invested more in government securities than they lent to firms, farms and individuals.
Reserve Bank of India data shows bank lending in November rose by Rs70,208 crore, while investments by banks in government and other approved securities went up by Rs93,216 crore.
In contrast, the data for October showed banks had lent Rs1,09,057 crore in that month, while they had increased investments by Rs18,690 crore. In September, banks had in fact drawn down their investments in government securities.
A month’s data does not make a trend. But if the banks continue to pour money into government securities and go slow on lending that could mean a return of lazy banking, so called because all the bankers do is take advantage of interest rates going lower to park their funds in risk-free government securities and make a tidy profit as bond prices rise.
The trend is also evident from the credit-deposit and investment-deposit percentages.
The former has come down from 75.43% at the end of October to 74.58% at the end of last month. This also shows that the liquidity position of the banks has improved.
By contrast, the investment-deposit ratio has gone up, from 28.61% at end-October to 30.12% at the end of November.
Clearly, reducing the SLR—statutory liquidity ratio, or the amount banks are mandated to park in government securities—now will have no effect, because banks will anyway put their money in government securities, whether they or not are statutorily required to do so.
Interestingly, on a year-on-year (y-o-y) basis, growth in credit was 29.8% at the end of November, compared with 28.5% at the end of October. Also, y-o-y growth in government securities and other SLR investments was 14.3% at end-November, compared with 6.2% at the end of October.
This indicates that on a y-o-y basis growth in bank credit accelerated in November, but the growth in investments has been much faster.
As the slowdown gathers pace, growth in bank credit will come down, while growth in investments will increase.
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