Bank Credit Slowest During Demonetisation

Bank Credit Slowest During Demonetisation

During Demonetisation Period, Bank Credit Growth slowest since 1977.

Bank credit growth is slowest in at least 19 years for the month of December to 5.1 per cent, showed the Reserve Bank of India (RBI) data. In the corresponding period a year ago, the growth was more than double at 10.6 per cent. The credit growth has been steadily declining since November post the announcement by Prime Minister Narendra Modi to withdraw high value notes from the system.

When the government failed to replace these notes in time with new notes, the cash crunch that followed hit the economy and impacted the business of small and big firms in several sectors. The slump in the bank lending growth figures is only a reflection of that.

A sudden fall in bank lending to historic lows doesn’t sound good for an aspiring economy. It shows companies which are the major borrowers do not have enough business activities necessitating demand for bank money. Also, individuals are on a cautious mode to go for new car, auto and home loans.

The RBI data suggests that slowdown in credit is across all segments and not just companies, including the retail segment where, the only segment where a growth is registered is in vehicles loans.

“Demonetisation has pushed credit growth to historic low. The low credit growth is a matter of concern, as the fortnightly data of ASCB indicates that credit off-take (YoY) has declined to a historical low of 5.1 per cent as on 23 Dec’16. During the period 11 Nov to 23 Dec’16, credit off take has declined by Rs 5,229 crore, while banks’ deposits grew by around Rs 4 lakh crore,” said SBI economists in a research report.

There is a possibility that the recent steep cuts in retail lending rates by a host of banks led by the State Bank of India (SBI) could spur individual loan demand but it will take time for industries to recover from the jolt. Early this week, SBI cut its home loan rates to 8.6 percent compared with 9.1 percent earlier.

This is adding the 60 basis points spread above the new MCLR (marginal cost of lending rates) of 8 percent. Other banks like Punjab National Bank, Union Bank of India too, have brought down their benchmark lending rates by up to 0.9 percent.

This is good news for new borrowers since big reduction in home loan interest rates means their loan tenure would come down by a few years for those who opt for 20-25 year home loan, but existing borrowers may not benefit since banks have retained their base rate where it is based on which the old contracts are agreed upon.

That is so unless these customers pay a fee and shift their loans to the MCLR-based loan structure. Will this round of bank lending rate cuts spur credit growth? As the SBI economic research report points out, past evidence suggests that lower rates have indeed spurred the growth in bank lending. Here, one needs to wait and watch for more data.

The sharp drop in bank credit growth is a reminder to the Modi government that industries are finding it difficult to face the demonetisation pain and the cash crunch needs to be resolved as quickly as possible. This is purely because demand for bank money is hit badly by the note ban resulted cash crunch. Banking sector is a direct indicator of the health of the economy.

With the private sector spending remaining week, it is even more critical for the government to ramp up public spending in infrastructure and put more money into the pockets of the people. Recently, finance minister Arun Jaitley had listed out the gains of demonetisation to the economy citing data to say why the critics of note ban are wrong.

The main points Jaitley made were rise in indirect tax, direct, higher sales of life insurance and mutual fund products, increase in tourist arrivals and fuel consumption. “Assessment can be unreal, but revenue is real,” the FM said.

Jaitley should take note that bank lending growth slowing to 19 year lows too is real and reflect what is going on at the ground in the economy.

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