Loan growth slows down on impact of higher interest but deposits pile up

MUMBAI: Banks are seeing a slowdown in loan growth this year, reflecting in a way the impact of higher interest costs and a slowdown in investments. The latest RBI data shows that total loans extended by commercial banks rose Rs 46,392.12 crore since April this year to Rs 3,924,192.37 crore as on June 18.

Loans grew Rs 61,149 crore in the same period last year. However, bankers point out that much of the loan growth last year was due to the demand from telecom companies to pay for licence fees for various spectra that were auctioned by the government. But this year, borrowing rates have also gone up, though traditionally credit offtake is sluggish during the first quarter.

Many banks have raised their lending rates over the past one year, pushing up the cost of funds. “High interest cost and input cost have prompted companies to put new projects on hold, which in turn could affect credit growth,” said Vijaya Bank CMD HSU Kamath. He, however, added that his bank is hopeful of credit growth of 19-20% since there are several projects that are in the pipeline and banks have sanctioned loans. “But at the same time, there is some slowdown in the general industry capex,” he said.

Banks have at the same time raised much more deposits this year. Deposits grew by Rs 139,998.35 crore since April this year compared with Rs 24,715 crore during the same period last year. As a result, the gap between deposit and credit growth has improved from -8 percentage points in December 2010 to -2.7 percentage points in June. “We expect this trend to continue in the coming quarters, with two implications.

The widening gap between inflows (deposits) and outflows (credit) bodes well for the banking system liquidity. Its continuation should deter banks from raising high-cost deposits,” said Sonal Varma and Aman Mahunta of Nomura Securities in a report.