Bank Credit Growth Slides Further In December

Credit growth has slowed further in the wake of the demonetisation-induced cash crunch to 5.16 percent as on December 23 on a year-on-year basis, according to data released by the Reserve Bank of India.

In the previous fortnight, as on December 9, credit growth of all scheduled banks had slowed to 5.76 percent, the slowest in 25 years, according to data available on Bloomberg and with the RBI.

The demonetisation of Rs 500 and Rs 1,000 notes has led to a surge in cash deposits. Deposit growth, as on December 23, stood at 16 percent on a year-on-year basis, the same as it was on December 9. A year ago, deposits were growing at just under 11 percent.

The surge in funds has led banks to sharply slash their lending rates in the hope of bolstering credit growth. State Bank of India, India's largest bank, led the charge, cutting its one-year marginal cost of funds lending rate by 90 basis points to 8 percent with effect from January 1.

A host of other banks followed suit, the latest being HDFC Bank which cut its benchmark rate by 75 basis points to 8.15 percent with effect from January 7. On Tuesday, ICICI Bank announced a 70-basis-point cut in its one-year benchmark rate to 8.20 percent.

At a press conference conducted on Monday, SBI Chairman Arundhati Bhattacharya had said the sharp reduction was a bid to kickstart flagging credit growth, which for her bank had slowed to around 7 percent. The move, she hopes, will push credit growth for the full year to 8-9 percent.

SBI is hoping that home loans, one of the fastest growing retail segments, will be the driver of credit growth. Earlier in the week, the bank reduced its home loan rate to 8.60 percent for women and 8.65 percent for others from 9.10 percent and 9.15 percent respectively in November.

However, analysts are not too sure that the lower rates will lead to a spike in house purchases.

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