Banks Continue To Lend Less Even As Deposit Growth Improves, Credit Growth Now At a Mere 6.5%


Risk-averse banks have continued to lend less and less to customers despite the double-digit growth seen by bank deposits. The overall credit growth rate in the banking sector for the fortnight ending May 8 stood at 6.5%, while the bank deposit growth rate was at 10.6%, according to Care Ratings.

“The credit growth further moderated during the last two fortnights to 6.7% and 6.5% levels compared to a year-ago level of 13.0% (as of May 10, 2019). The declining trend in credit growth continued since the quarter ended March 2019 owing to the rise in risk aversion in the banking system and the lockdown due to COVID-19,” Care Ratings said in a report.

The credit growth rate in the banking sector was higher than the deposit growth rate until June 2019, according to data provided by Care Ratings. Since then the credit growth rate has continued to fall while the deposit rate has taken the complete opposite path for the banks. Since March 2019, the bank deposit growth rate has jumped slightly over 1% while the credit growth rate has tanked over 7%. The banking system continued to remain in a liquidity surplus of more than Rs.5.45 lakh crore during the week ended May 8, according to the report.

The share of deposits to overall liabilities among the sector was seen to be stable at 90.5% after having fallen to 89.9% in the month of March of the banks. The moderation in share has been largely due to a higher base of total liabilities, which is due to an increase in currency in circulation.

“The increase in currency in circulation can be attributed to a desire to hold more cash in the lockdown period,” Care Ratings said. Banks have seen more time deposits rather than demand deposits, accounting for the majority of aggregate deposits. “… in April 2020, It seems that the depositors have tried to lock cash into time deposits as the outstanding time deposits increased from Rs 119.54 lakh crore on March 27, 2020, to Rs 123.91 lakh crore on May 8, 2020, an increase of Rs.4.37 lakh crore during this period,” the report said.

Since the outbreak of coronavirus, the central government and the Reserve Bank of India have continued to make efforts to increase credit growth. The Central Bank in an out-of-schedule monetary policy committee meeting last Friday announced a 40 basis point rate cut. According to Care Ratings, this move by the central bank could lead to a reduction in banks MCLR rates which in turn could reduce the borrowing cost.

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