The RBI has, in its Financial Stability Report (FSR), stressed on the need for a pick-up in credit, considering that credit cycles have been leading business cycles in the post-reform period. Higher credit cycles can be seen during an increase in demand for credit, surge in investments and a benign interest rate period.
The report also stated that growth in credit and deposits has been relatively slow in the recent past with the slowdown in credit growth being broad-based barring agriculture and allied activities.
“Credit growth on a year-over-year basis continues to decline and recorded low growth at 10% as of September 2014,” said the report. It pointed out that PSBs under-performed with a growth of 7.9%.
According to bankers, the lack of project loan disbursements due to weak demand from corporates has been the key reason for low credit growth. Some bankers are of the view that a base-rate reduction by even as much as 15 bps would not contribute significantly to the growth in credit because the demand still remains slack.
The report also stated that low credit growth reflects a combination of factors such as reliance on alternative sources of funding, balance sheet repair and slack demand as also an element of risk aversion. In 2014, many corporates sought alternate ways of fund-raising with the fall in corporate bond yields or the rate at which companies can raise money through bonds.
The report indicated that growth in deposits declined to 12.9% as of September 2014 from 13.7% as of March 2014. “With both credit and deposit growth more or less same, the outstanding credit to deposit (C-D) ratio at the aggregate level remained unchanged at around 79%,” it added.