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Business News/ Money / A dose of economic reality: credit growth contracts
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A dose of economic reality: credit growth contracts

A dose of economic reality: credit growth contracts

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Recall that one of the earliest macro indicators that the economy was getting better was a substantial rise in bank lending last February. That turned out to be a turning point for market sentiment and it wasn’t long before several “green shoots" of recovery were sighted and the markets started to climb.

Well, the latest data from the Reserve Bank of India shows that bank lending for the month to 8 May fell by Rs19,940 crore. That bank lending is contracting is not alarming, as credit usually falls during this time of the year, because window-dressing by banks during the end of the fiscal year in March pushes up lending around that period, with the result that loan growth falls thereafter.

Also See Loan Growth Falters (Graphics)

Moreover, the first few months of the fiscal year traditionally form the slack season for credit growth. But what is worrying is that the year-on-year (y-o-y) rate of credit growth is steadily decreasing.

Here are the numbers for y-o-y credit growth for all scheduled commercial banks: 13 February: 18.9%; 13 March: 17.4%; 10 April: 18.1%, 24 April: 17.4%; and 8 May: 16.6%. As the chart shows, while total loans fell during the month to 8 May, they had increased by Rs14,817 crore over the same period last year.

To be sure, there are many signs of growth returning, seen from micro as well as the macro data. It’s also possible that credit growth will resume once the new government starts functioning. But the deceleration in y-o-y credit growth underlines the fact that the economy continues to be very weak.

Meanwhile, the deceleration in loan growth has led to banks parking their surplus funds in investments, especially Central and state government securities that form part of the statutory liquidity ratio that banks are required to maintain. Here is the trend for y-o-y growth in investments: 13 February: 19.2%; 13 March: 20.1%; 10 April: 22.8%; and 8 May: 25.2%.

It’s no surprise then that the bond markets are awash with liquidity and bond yields have been falling.

Write to us at marktomarket@livemint.com

Graphics by Paras Jain / Mint

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Published: 21 May 2009, 10:56 PM IST
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