In its latest review on the economy, the RBI has indicated that it intends to tighten the monetary policy. This view is reflected in the bank credit off-take. For almost in 12 years, credit growth has dropped to single digit, at 9.66% on a year on year basis for the first time against a growth rate of 10.75% in the last fiscal as per available data. To protect and to maintain their books, banks had parked more than Rs.133,925 Crores with RBI through reverse repo window which is normally used to suck out the excess money from the system.
This will have a far reaching consequence on consumer demand. The expansion plans of companies will also get affected because of this. With no demand for working capital from companies, which indicates lack of credit demand from manufacturing sector, forms the major drawer of credit off take. With the assumptions that interest rate is to go up, it is being reported that companies are tapping the other section of financial market such as issuing corporate bonds and going for initial public offering.
This particular source of raising capital is the cheaper route for companies than the borrowings from banks and this almost accounts for 70% of the long term fund requirements for Indian companies. The main drawer of credit off take, the oil & gas and fertilizer companies had indeed shown a lower credit demand so far. This is because of the government idea to defer the payment of subsidy on fuel prices. The other main reason for the lackluster demand of credit off take is attributed to the availability of foreign funds through credit default swap which is hovering around the pre-Lehman rates.
The sluggish credit off market in the first half of the year so far will have a bearing on the banking industry on the whole and will fall short to meet the RBI’s revised target of 18% of credit off take as against 20% estimated in the month of April, in this financial year. To maintain a sustained recovery of the economy it is important to have a low interest rate regime for some more time. Also, the credit off take requirement from manufacturing sector will not improve unless any major project is undertaken or the global recovery is sustained for few more quarters.
The banks are as reluctant as ever before to lend much to the real estate, gem & jewellery, textiles, leathers, NBFC’s and etc., as these are the sectors got affected much in the recent financial turmoil. But at the same time, these are the sectors which are the main driver of the economy and as well as generators of large employment. So, with the indication from the RBI that it is going to tighten the monetary policy to fight against rising inflation which is undoubtedly a supply-demand driven indicator is going to have bearing on the credit off take of major banks and will have affect the growth of the banking industry. But nonetheless, the banks had produced a decent second quarter results.