Non-food credit growth hit a multi-year low of 5.3% on a year-on-year (y-o-y) basis during the fortnight ended December 23, data released by the Reserve Bank of India (RBI) showed. This marks a worsening from the 5.9% growth figure clocked in the previous fortnight.
With growth in food credit falling 5.3% y-o-y, overall bank credit grew just 5.1% to R73.48 lakh crore.
Deposits with the banking system rose 15.1% y-o-y during the fortnight under review to R105.16 lakh crore. The figure, however, marked a 0.7% drop from the previous fortnight. This is the first time in two months that aggregate deposits with the banking system have fallen. Banks had been seeing a steady rise in deposits since the government announced the demonetisation of R500 and R1,000 notes.
The credit-deposit (CD) ratio of the banking system, or the proportion of deposits deployed as loans, rose marginally to 69.87% from 69.29% in the previous fortnight. The ratio had been falling successively since demonetisation as banks sat on piles of deposits in an environment of weak credit demand.
The last few days have seen banks and housing finance companies slashing lending rates aggressively in an attempt to stoke retail credit demand. The country’s largest lender, State Bank of India (SBI), on January 1 reduced its one-year marginal cost of funds-based lending rate (MCLR) by 90 basis points (bps) to 8% and increased the spread over MCLR for most retail loans. Other lenders have followed suit, bringing down their MCLRs by between 15 and 85 bps.
The series of rate cuts have led to some analysts suggesting that the net interest margins of banks may be hit in the quarters ahead. However, in a note dated January 3, analysts at Nomura wrote that the impact on margins may be limited as loans based on the MCLR regime constitute only a small proportion of banks’ overall portfolios. “For most large banks MCLR-linked loans currently account for 15-20% of total loans, with the exception of the SBI for whom the proportion of MCLR-linked loans is 40%. The rest of the floating loans are based on base rate and the reduction in base rates has been significantly larger,” Nomura wrote. “Since base rate-linked loans form 40-50% of banks’ loan book, MCLR cuts don’t automatically affect yields of base rate-linked loans.”