Weak credit off-take spell trouble for banks

Weak credit off-take spell trouble for banks

New Delhi: Targeting inflation, the Reserve Bank of India has raised the policy rate 11 times since March 2010. While inflation continues to stay above the central bank’s comfort zone its strategy of targeting inflation through containing the credit growth is working, albeit slowly. Read more...

For the fortnight ended 26 August, sequential credit off-take of all scheduled banks has fallen by 0.1% to 41.70 lakh crore. In the previous fortnight, banks lent 3,027 crore more.

On a year-on-year level, even though banks continue to register healthy credit growth rates of 20% plus levels, slowing credit growth on a sequential basis signals weakening loan demand in the domestic economy.

High interest rates and uncertain macro-economic environment are deterring consumers from taking fresh loans. With inflation eating into disposable incomes, consumers are getting wary of taking fresh financial burden. The trend is clearly visible in the consumer borrowing numbers. According to Nomura Global Economics, growth in consumer durable loans has fallen sharply to 8.9% in July.

Tomo Kinoshita and Aman Mohunta of Nomura Global Economics note:

Growth in consumer durable loans outstanding deployed by scheduled commercial banks fell sharply to 8.9% y-o-y in July from 22% in June suggesting consumer sentiment is turning negative in India. We believe that high interest rates and elevated inflation are bearing down on discretionary consumer spending in India.

Easing credit demand in a high deposit rate environment spells trouble for banks. For the fortnight ended 26 August, as lending fell 0.1%, deposits with banks have registered a growth of 0.3%, which means that high cost funds are entering the banking system at faster pace than credit off-take.

According to Amit Jain of PUG Institutional Research, the incremental credit-deposit ratio of banks has fallen to 84.8% in August from 94.3% in May. This means banks are taking more deposits than lending, which could hurt net interest margins if this trend continues for long.

Amit Jain of PUG Institutional Research says:

Due to rising interest rates, time deposit growth continues to improve with 21.2% YoY growth, which is partly due to shifting of demand deposits towards term deposits. Strong growth in term deposits when credit off-take is muted creates stress on margins of the banks.