The Growth of Bank credits slew down in decades

Mumbai,January : The Growth of bank credit fell to a multi-decade low of 5.1% for the fortnight ended December 23, as drying up of demand in the last two months of the year saw businesses cutting down on borrowing.

Data released by RBI showed that as of December 23, bank lending to businesses, individuals and the farm sector stood at Rs 73.48 lakh crore, an increase of 5.1% over the same period of last year.

Going by readily available RBI data, this is the slowest rate of growth since 2000. SBI chief economist Soumya Kanti Ghosh went further to say that credit growth was actually the lowest in over 60 years - since 1954-55 - when it had slowed to 1.7%.

A slowdown to 5.1% in December seems to indicate that credit growth is reaching a point of no return in this financial year.While, there is marginal growth year-on-year, on a year-to-date basis (from April 2016) credit has declined in many sectors," said SBI chief economist Soumya Kanti Ghosh.Year-on-year credit growth in the previous fortnight ended December 9 was also a low 5.76%.

DK Joshi, chief economist at Crisil, the country's leading credit rating agency, attributed the drop in credit growth to the disruption caused by demonetization. "Otherwise there was no reason for credit growth to fall. The economy was looking up, there was the pay commission hike, there were good rains, and some interest rate cuts were being passed on to borrowers, which would have created more demand for credit," he said.

The second half of the year is when banks advance the bulk of their loans. A slowdown at this time will hurt growth targets, said economists.

"Demonetization has hurt activity across all corners of the economy. Purchasing Managers Index (PMI) data shows that both manufacturing and services have contracted in December.The PMI order-to-inventory ratio suggests that upcoming manufacturing activity will also remain weak.

Input prices have been rising, but have not yet been passed on to final prices, suggesting that corporate margins have worsened," said Pranjul Bhandari, chief economist, HSBC India in a report.

"Given that 56% of bank loans and 88% of non-performing assets are with large borrowers, they hold the key to bank credit growth pick-up and asset quality improvement," the research firm said in a report.