RBI concerned as credit growth outstrips deposit mobilization

MUMBAI:
 Reserve Bank of India has expressed concern over the high rate of credit in the banking system. This has resulted in the ratio of bank credit to bank deposits (CD ratio) rising sharply triggering alarm bells in the central bank.
"Our problem is that banks are giving too much loans compared to the deposits they mobilize. Their credit-deposit ratio is 78% and their incremental CD ratio is more than 80%. Our concern is that if banks are not able to mobilize deposits, so how will they be able to grow their loans," said KC Chakrabarty, deputy governor, Reserve Bank of India speaking at an event to launch a financial inclusion programme by Kotak Mahindra Bank to cover milk producers in Gujarat and West Bengal.

 
 According to data released by RBI, the year on year growth in bank credit as on September 20 was almost 18% while the deposit growth was only 14.1%. This is despite a slowdown in the economy with many sectors reporting a drop in sales. Banks say that credit has grown partly because of the tight liquidity situation created by RBI to support the rupee. This has resulted in corporates, which earlier raised funds in commercial paper or bond market, now turning to bank loans. Some bankers feel that the slowdown also results in longer working capital cycles as corporate require longer term loans to fund their slow moving inventory.

 

Banks need to maintain upto one fourth of their deposits in government bonds and another four percent of their deposits in the form of a cash reserve ratio with RBI. This leaves less than 75% of their deposits free for lending. However, in theory banks can have a credit deposit ratio of even over a 100% if loans are out of shareholder funds and banks have enough capital to meet statutory requirements.
The deputy governor's statement comes at a time when the government is talking about a 'funding for lending' programme whereby the centre would infuse cash into public sector banks to enable them lend to the consumer segment and spur demand.
Chakrabarty said that RBI has no problem if banks can give as much loan as they can to whatever sector they feel is important. "In our view credit is more necessary for productive purposes it is agriculture and SME that require more credit," said the deputy governor.
He also said that there was no move to prevent banks from extending loans through EMI payments under credit cards clarifying that the circular on zero interest rates was aimed more at transparency

vikash chandra mishra

PGDM 1st year