A strong credit growth indicates buoyancy in an economy. While Credit offtake has been increasing steadily from the beginning of the Financial Year 2004-05 onwards, the last few months have witnessed an unprecedented growth in the credit demand. It is evident from the fact that liquidity position of the banks has been coming down. Banking sector had a surplus liquidity of Rs. 462 bn as on March 3, 2004 which plummeted to Rs. 70 bn short fall as on March 3, 2006, resulting in a liquidity crunch. The sharp growth in the credit, therefore, poses challenge to the banks.
With the Indian economy in an upbeat mood, the production of capital and consumer goods recorded a double-digit growth rate during the first half of 2005-06. To enhance their capacity additions, demand for credit from capital intensive sectors has increased. Also, the Central Government is initiating dynamic measures to double institutional credit to agriculture in three years. Decline in public expenditure and redemption of India Millennium Deposits (IMD) have also aggravated the problem. Besides, commercial banks have surpassed the half year target on flow of credit to agriculture in 2005-06. There has been strong thrust on infrastructure development in the country and credit to this sector grew faster than average credit growth. The broad based strengthening of real economic activity has boosted the demand for credit in commercial sector. Anil K Khandelwal, CMD, Bank of Baroda, says, "The most important ones are the rising business confidence and improved income and consumption levels in the country." Credit growth has become multifaceted in the last two years. Sectoral shifts were observed in credit deployment by banks. Investments in housing and gold are increasing as a natural choice to hedge their long-term savings against inflation. Other retail loans have also increased due to rising incomes and repayment capacity. The credit growth to agriculture sector is targeted to be increased by 30% in 2005-06. Tanvee Gupta, Economist, ICICI Bank Ltd., expects, "Bank credit disbursal would be well diversified across different sectors for the economy in the future with a substantive pick-up in flows to the small scale and agricultural sector".
While credit is growing, lower deposits on the other hand also put pressure on the banking industry. Though deposits base is higher than the credit base, the credit growth poses a concern for the banks. Aggregate deposits for the week ending February 17, 2006 registered an increase of 17% as against 32.2% increase in credit on YoY basis. With mismatching credit and deposit growth rates banks have tough time to face. Bank deposit, which was one of the main avenues for the savings has taken a backseat due to other alternatives like Post Office savings and National Savings Certificates which give better returns. Increase in the risk appetite of the investors has also increased and they have started investing more in IPOs and mutual funds. Due to rising interest rates overseas, there is a slowdown in the inflow of foreign deposits. People are less inclined to deposit their surplus funds with banks as more returns are expected from these investments. Manoranjan Sharma, Chief Economist, Canara Bank, says, "Banks have to make out all efforts to enhance the deposit portfolio with an accent on lost-cost deposits and periodically review the overall deposit portfolio and the deposit-mix in conformity with the liquidity requirements and the profit-centric approach".
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