People prefer saving over taking loans; bank credit at half the last year’s rate, deposits in full swing

Weak demand in the market and risk aversion in the banking system have kept the credit growth at nearly half the level of the last year. The credit growth during the last two fortnights were 5.3 per cent and 5.5 per cent, compared to last year’s level of 10.4 per cent and 10.2 per cent. SCBs are being very selective with their credit portfolios due to asset quality concerns and the overall bank credit is expected to remain slower in the near term, said a report by Care Ratings. On the other hand, the deposits are growing at a higher pace than last year. 

Deposits surged 12 per cent, compared to 10 per cent growth a year ago. The deposit growth was faster for fortnight ended 11 September 2020, compared to the last two years, where deposits registered a growth between 8-11 per cent. The current trend in bank deposits indicates that the depositors are spending less and saving funds in bank deposits, the report added. 

Also Read: Forex reserves touch lifetime high at $545 bn; bank deposit rises faster than last year, shows RBI

While the Reserve Bank’s effort to raise bank credit by slashing repo rate and linking retail loans directly to the policy rate extended little help to the banks to grow their businesses, the deposits dramatically increased soon after the lockdown was announced. Bank deposits had risen over Rs 2.8 lakh crore in three fortnights of the lockdown till May 8, while bank credit during the period fell by Rs 1.2 lakh crore, according to the previous data released by the RBI. This had added nearly Rs 4 lakh crore to the liquidity in the banking system by then. 

Meanwhile, banks have been recently advised to have an appropriate IT system in place for identification of non-performing assets (NPA), and generation of related data or returns for regulatory reporting and bank’s own MIS requirements. Banks still identify NPAs manually and also sometimes over-ride the system generated asset classification by manual intervention in a routine manner.