Deposit shortfall may affect growth in bank credit: Care
24 Jan 2011
While RBI's projected credit growth of 20 per cent (Rs6.5 lakh crore) appears to be on track, the projected deposit growth of 18 per cent (Rs8 lakh crore) has fallen short.
According to rating agency Care, growth in credit has been stable even after adjusting for the 3G auctions. This may be seen in the sharp increase in the incremental credit deposit ratio this year, which is over 100 per cent. The absolute credit deposit ratio has also increased by over 5 per cent points. Growth in deposits was tardy due to:
1. Increased consumer spending on account of higher inflation and lower savings
2. Higher holdings of currency ostensibly to guard against inflation
3. Periodic switching of funds to IPOs especially of PSEs
4. Lower spending by the government
State cooperaticve banks had also provided support to the private sector through investments in CPs, bonds / debentures, etc, to the extent of Rs35,427 crore as against Rs2,900 crore last year.
According to the report, the higher increase may be attributed to the shift in preference for CPs after the introduction of the base rate. However, towards the end of December, the higher CP rates have narrowed down this increase.
| Table 1: | ||
| Rs crore | 2009 | 2010 |
| Deposits o/s as of 31st December | 42,15,348 | 49,71,390 |
| Incr. Deposit (Apr-Dec) | 4,34,713 | 4,78,564 |
| CRR (%) | 5 | 6 |
| Inc Deposits adj. for CRR | 4,12,977 | 4,49,850 |
| Credit o/s as of 31st December | 29,71,932 | 37,63,213 |
| Incr. Credit (Apr-Dec) | 2,49,022 | 5,18,424 |
| C/D ratio (%) | 70.5 | 75.7 |
| Incremental C-D ratio (%) | 57.2 | 108.3 |
| Source: RBI | ||
| Table 2: RBI's Repo facility used by banks | |||||
| Rs. crore | Sept | Oct | Nov | Dec | Jan |
| Till 14th | 17th onwards | ||||
| Repo flows | 30,245 | 60,016 | 1,03,727 | 1,21,935 | 1,10,735 |
| Source: RBI | |||||
Trends in bank borrowings from RBI through the liquidity adjustment facility show that the deficit in liquidity has become deeper. Bank borrowings have risen from Rs30,245 crore in September 2010 to Rs1, 21,935 crore in December 2010.
Since 17 January banks have been borrowing over Rs1 lakh crore from the RBI at the repo rate of 6.25 per cent.
The government has so far borrowed Rs4,06,000 crore as on 21st January 2011 as against Rs. 4,32,000 crore as on 15 January 2009.
The union Budget estimated an amount of Rs4, 57,000 crore to be borrowed by the government of which Rs11,000 crore were reduced on account of tight liquidity. The government is still to borrow approximately Rs40,000 crore, which will be easily financed given the redemptions to take place.
Further, the government has not been spending much adding to the pressure on liquidity.
Steps taken by RBI to fight light liquidity problems
In order to tackle the shortage of liquidity RBI reduced the SLR from 25 per to 24 per cent in its mid-quarter monetary policy of December, so that banks could use the securities to raise funds from RBI.
RBI has undertaken four OMO auctions for purchase of Government securities for an aggregate amount of Rs. 48,000 crore over a period of four weeks. However, has been able to infuse Rs. 37,067 crore into the system.
| Table 3: RBI's OMO auctions since December | |||||
| Rs. crore | 1st OMO | 2nd OMO | 3rd OMO | 4th OMO | Total |
| 12,000 | 12,000 | 12,000 | 12,000 | 48,000 | |
| Repo flows | 8,057 | 11,502 | 10,001 | 7,507 | 37,067 |
| Source: RBI | |||||
Considerations for RBI
| Table 4: Summary of the State of the Economy | ||
| Growth rate (%) | FY10 | FY11 |
| GDP (Q2) | 8.7 | 8.9 |
| IIP (Apr-Nov) | 7.4 | 9.5 |
| Exports (Apr-Nov) | -14 | 24 |
| Imports (Apr-Nov) | -19 | 18 |
| Equity issues (Rs cr) Apr-Dec | 66, 825 | 81,781 |
| Debt issues (Rs cr) Apr-Dec | 1, 29,921 | 1, 58,552 |
| Exchange rate (avg) | 47.4* | 45.7* |
| Source: RBI, CSO, Commerce Ministry, CMIE | ||
- The economy has grown at 8.9 per cent in the FY11 as against the average 7 per cent in FY10. Agriculture and allied activities showed a growth rate of 4.4 per cent in Q2 FY11. Manufacturing and Construction sectors reflected a growth rate of 9.8 per cent and 8.8 per cent , followed by Mining & quarrying at 8 per cent in Q2 FY11. CSO has revised the Q1 FY12 growth forecast from 8.8 per cent to 8.9 per cent .
- Index of Industrial Production (IIP) numbers have been volatile, but the trend appears to be downward for the remaining months on account of the high base values from December to March.
- India`s foreign trade performance in recent months has shows considerable improvement.
- Export growth has surpassed import growth. Despite hardening of international oil prices, flattish oil import volume is containing imports growth.
- Exchange rate has been in the range of Rs. 44-46 against the dollar since the third quarter of FY10. We expect the rate to be in the Rs 45-46 range till March.
However, inflation a bigger problem
The annual rate of Inflation for the month of December stood at 8.4 per cent as against 7.5 per cent in November. The built up inflation from March this year is 6.1 per cent as against 7.9 per cent in previous period. The PM's advisory council has revised its inflation forecast upwards to 7 per cent for FY11.
Policy approach expected - going ahead
- Credit target of Rs6.5 lakh crore seems to be achievable. However, deposit growth looks unlikely. Therefore, liquidity situation appears to be tight. Current CRR rate is at 6 per cent , a reduction in the same by 50 bps would help ease the liquidity problem. But, this will be a tough call to take given that the focus is on inflation presently.
- RBI has been saying time and again that inflation is its major concern and would take every action to curb it. Therefore, an increase in interest rates by 25-50 bps in tomorrow's credit policy seems highly possible. However, a review will be necessary to evaluate its impact on growth even though for the first 3 quarters, growth has been resilient to interest rate changes.
Interest rate hike in the upcoming credit policy would increase deposits and curb credit growth but only marginally.
It is critical for RBI to recognize the bigger problem from high inflation rates and tight liquidity. Interest rate hike and CRR cut would be contradictory moves; however this may just about be advisable.
