The credit offtake in the system continues to fall. During the fortnight for the two weeks ended June 5, 2009, bank loans have risen Rs 21,459 crore, thereby, taking outstanding advances to Rs 27,57,210 crore.

However, credit growth year-on-year (y-o-y) basis further slid by 15.68%, or Rs 3,73,867 crore, as on June 5, as against 15.86% on May 22.

The deposit growth rose by 22.01%, or Rs 7,16,694 crore, as against 22.57%, the previous fortnight, according to the data released by the Reserve Bank of India (RBI) on Wednesday. During the previous fortnight ending May 22, 2009, bank loans have dropped Rs 16,306 crore, thereby, taking outstanding advances to Rs 27,35,750 crore.

Bank credit had dropped by 15.86%, or Rs 3,74,544 crore, on year-on-year basis through May 22. At the same time, deposits growth have stayed almost flat at 22.57%, or Rs 7,30,565 crore, in the same period to Rs 39,67,995 crore.

The credit growth is falling despite the fact that the banking system is flushed with ample liquidity and experts are of the opinion that stimulus package announced in the past eight months is helping the economy recovery. The banks have parked an average of Rs 1,20,000 on a daily basis, with the RBI, nearly for the past two months.

However, credit growth is slowing down as banks are reluctant to extend financial support to those industries who have witnessed a poor credibility due to the slowdown.

?Our econometric model results suggest that the key drivers of credit growth are industrial production, stock market performance, time deposits, and lagged credit growth. All of these variables are likely to increase during the second half of 2009,? said Sailesh Jha and Rahul Bajoria, economists from Barclays Capital Research.

However, analysts point out the latest numbers on the improved industrial production to expect higher credir credit off take in near future.

Industrial production index rose 1.4% y-o-y in April, the best result since November.

The manufacturing production expanded 0.7% y-o-y, an acceleration following the 1.6% contraction in March.

According to Moody’s, April?s industrial production data points tentatively to stabilisation for the industrial sector.

Demand for the industrial sector?s consumer goods appears to remain weak, but this has been offset by government infrastructure and construction projects.

Although borrowing rates remain high for businesses compared to regional peers, interest rates have fallen and this has helped to boost demand for housing and construction activity. Looking at a breakdown of production by category, what is striking is a surge in consumer durables production coinciding with a slump in non-durables.

Lower interest rates are likely to be part of the explanation, with durable good purchases often requiring loans. Durable goods production has also been aided by discounting from retailers trying to appeal to less optimistic consumers, stimulating demand, said Moody’s.