The Hindu Business Line : Credit-deposit ratio hits a high of 74.13%

New Delhi April 15 When the definitive history of money and banking in India is written, 2006-07 would easily rank among its most eventful years. For, the fiscal just ended has witnessed a credit and monetary expansion binge that is unprecedented in both absolute as well as relative magnitudes.

During 2006-07, banks lent out an additional Rs 410,285 crore, which is an all-time record. Further, their outstanding fiscal-end credit as a proportion of deposits (C-D ratio) touched 74.13 per cent — the highest since the 74.99 per cent level of 1976-77. Significantly, the C-D ratio had, only in 1998-99, plunged to an all-time-low of 51.66 per cent!

In fact, it is not too long ago, when banks were chided for being extra prudent and parking a substantial chunk of their deposits in government securities. This was reflected in the proportion of their deposits invested in gilts and other `approved' securities (I-D ratio), which hit a historic high of 45.04 per cent as late as 2003-04. The same ratio ended in 2006-07 at 30.54 per cent, making it the lowest since the 30 per cent reached way back in 1970-71!

Plainly put, never before has such a dramatic shuffling of banking portfolio and corresponding swing in attitudes — from extreme risk-aversion to aggressive loan-pushing — taken place in so short a time period. That has been facilitated by two underlying factors. The first is a booming economy that has led to a spurt in credit demand from not just industry, but also the retail home loans and consumer finance segments.

The second stimulus has come from the massive injection of primary liquidity by the Reserve Bank of India (RBI), resulting from its mopping up of foreign exchange inflows. 2006-07 has recorded the highest ever build-up of RBI's net forex assets, which, despite all efforts at sterilisation, has generated a record expansion in Reserve Money. This primary liquidity, manifested as new currency with the public or loanable cash with banks, has then provided the base for additional rounds of deposit-cum-credit creation. Just to illustrate, the total broad money or effective purchasing power in the system created during 2005-06 and 2006-07 was twice the increase of the preceding two fiscals.

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