The Hindu Business Line : Credit offtake declining

The high-octane credit offtake during the last few months is increasingly becoming history and worry bells are beginning to chime in top bank boardrooms.

The deceleration in credit offtake was evident from the falling credit deposit (CD) ratios. This ratio indicates the component of credit to a bank's deposits. The nominal CD ratio is currently at 69 per cent. On the face of it this ratio appeared comfortable. However, it is the incremental CD ratios that have sharply dipped. The Reserve Bank of India's weekly statistical bulletin for the reporting week ended May 26, showed the incremental ratio CD at 43 per cent which is a three-year low. A year ago incremental CD ratio was over 125 per cent.

Some bankers said that the drop in CD ratios was largely on account of deposit accretions. But deposit accretions have also not been very good for the banking sector. Deposits since the beginning of FY06 have grown only by 1.3 per cent since the beginning of this financial year or Rs 27,214 crore. In fact, most of the deposit build-up was mostly for short tenures. These included 46-day time and savings deposits. Long tenure term deposit growth was yet to pick up, bankers said. This was despite the hikes in rates since the beginning of FY06. Many of the banks were offering rates upwards of 7 per cent. Yet the impact of the hikes was yet to be felt in long-term deposits, prompting many of them to resort to certificates of deposits route, a far more expensive option.

Credit growth

Credit growth has fallen by 0.9 per cent since the beginning of FY 06. The fall has been sharpest in non-food credit growth, which dropped by Rs 12,334 crore this financial year so far. A top banker said, "This is seasonal, when credit offtake is traditionally low." Yet during the corresponding period of the last financial year, credit grew 3.7 per cent and non-food credit grew by Rs 36,038 crore.

This is a trend that began after the RBI imposed additional provisioning and risk weights. Provisions on standard assets were hiked . Risk weights on real estate loans were pushed up to 150 per cent. Banks have promptly reacted by hiking lending rates after factoring in the capital charge and provisioning components.

Bankers said that these were pointers to a possible liquidity tightening up. This is despite, large mop-ups through reverse repo auctions (the RBI's removal of liquidity through placement of securities). At the weekend reverse repo auctions, the mop-up was in excess of Rs 40,000 crore. Bankers said that this anomaly was largely due to many of them opting more defensive strategies. But this was also driven by an attractive spread on reverse repos that is as high 75 basis points (0.75 per cent)

Besides, treasury bills were also the favourites as highly liquid instruments. This bias was also one of the reasons for the slight pick-up in investment deposit ratios. Incremental Government securities investment deposit ratios have escalated to 71 per cent this year. Most of the increases were in the treasury bill that also included the market stabilisation scheme. Few ventured into dated securities since most of the banks have already shrunk their average maturity of their security portfolios to under three years.

Bankers said the preference for liquidity was in anticipation of a large increase in farm credit offtake, ahead of the peak season after the middle of next month. That is hardly any comfort of many of bankers.

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