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Banks still prefer not to lend

Banks still prefer not to lend
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First Published: Sun, Dec 21 2008. 10 20 PM IST

Updated: Sun, Dec 21 2008. 10 20 PM IST
It’s easy to understand why the government is so keen that banks reduce lending rates—credit growth turned negative in the week to 5 December.
This column had pointed out earlier that lazy banking had made a return in November, with banks preferring to put their money in government securities rather than lend it out.
The same trend was reinforced in the first week of December—growth in non-food credit was a negative Rs80,470 crore, while investments went up by Rs7,074 crore. Between 7 November and 5 December, the increase in non-food credit has been just Rs7,550 crore, while investments have gone up by Rs35,141 crore.
Deposit growth also turned negative during the week to 5 December, with deposits falling by Rs94,618 crore. Nevertheless, the credit-deposit percentage of all scheduled commercial banks fell to 74.32 on 5 December, compared with 74.58 on 28 November, indicating a continuing easing of liquidity pressures.
On the other hand, the investment-deposit percentage went up, from 30.12 on 28 November to 31.12 on 5 December.
With banks betting that interest rates will come down further and putting all their money in government securities, it’s no wonder that yields on government bonds have plummeted.
Incidentally, money supply growth (year-on-year) was a high 20% as on 5 December, up a bit from the 19.2% y-o-y growth it showed on 7 November.
It’s interesting that money supply growth has held up in India at a time when Chinese money supply growth was the weakest in three years at the end of November. China’s money supply rose by 14.8% y-o-y in November and the rate of growth has been steadily coming down since it reached a high of 18% in May.
In contrast, India’s money supply growth has remained stable at between 19% and 20% since last August, although it’s lower than the 22% rate seen in May. Perhaps the big fall in money supply growth is a reflection of the extent of demand destruction in the Chinese economy—its purchasing managers index has been lower than India’s in the last few months, suggesting a bigger contraction.
Write to us at marktomarket@livemint.com
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First Published: Sun, Dec 21 2008. 10 20 PM IST