Mumbai: The credit growth of India’s banking system has dropped to a four-year low in 2007-08. The year-end data for bank credit, released by the Reserve Bank of India (RBI) on Friday, showed bank credit for fiscal 2008 grew at 21.6% or Rs4.17 trillion, sharply lower than 27.6% in 2007 and also below the central bank’s projection of 25% credit growth during the year.
RBI has tried to check rampant growth in sectors such as retail and consumer loans, mortgages and loans to real estate developers fearing asset bubbles were being created. So its insistence on higher provisioning as well as additional capital requirements in some of these sectors made borrowing more expensive.
While RBI did not hike rates last year, it squeezed out liquidity by raising banks’ cash reserve ratio, or CRR. As banks cannot lend this portion, they earn no interest on it and, hence, higher CRR makes the cost of money more expensive for banks.
But M.V. Nair, chairman and managing director of Union Bank of India, is not worried about lower credit growth. “After having a very high growth rate in the last three years, the industry needed some sort of consolidation. Given the prevailing high inflation rate and other monetary tightening around, I think the growth rate is pretty acceptable,” he said.
Prakash Mallya, chairman and managing director of Bangalore-based Vijaya Bank, said, traditionally, credit growth picks up in the second half but that did not happen in 2008. “The industry is concerned since with the slowdown in credit, our interest income also comes down,” Mallya said.
Neither Mallya nor Nair was willing to comment on the outlook of credit growth in 2009. “At this point, it won’t be fair to comment on the growth rate for 2009 as we have to see what measures RBI takes in its April policy,” Nair said.
As credit growth slowed, the growth rate in investments rose to 22.9%, against last year’s 10.4%.
Deposits growth for the current fiscal year were also down marginally at 22.2% compared with a growth of 23.0% in fiscal 2006-07.