RBI asks banks to beef up deposit mobilisation

The Reserve Bank of India (RBI) has asked banks to increase their deposit mobilisation efforts, saying the ‘easy liquidity’ conditions of last year won’t return as monetary tightening may be continued to tackle rising prices।
While credit growth for the year to July 2 was 21.2 per cent, which was in line with the central bank’s projection, money supply growth was at 15.3 per cent – below the projected trajectory of 17 per cent – due to unattractive deposit rates. Bank deposits form a major part of the money supply.

“The tightness in liquidity conditions would ease, but the calibrated normalisation of monetary policy may not lead to a return of the persistent easy liquidity conditions that prevailed last year. Banks, therefore, have to step-up mobilisation of deposits to meet demand for credit from both the private sector and the government,” RBI said in its Macroeconomic and Monetary Developments report for the first quarter.

The tepid deposit mobilisation by banks has made the incremental non-food credit-deposit ratio to over 100 per cent, RBI said.

“The deceleration in the growth of M3 continued up to mid-June. This was on account of the deceleration of its major component, that is, aggregate deposits. The moderation in the growth of time deposits was particularly sharp, which was partly a response to the low deposit rates, given the high inflation,” RBI said.

With the deceleration in deposits and acceleration in the growth of non-food credit, there has been a deceleration in banks’ investment in government securities since November 2009, when growth in non-food credit turned around.

However, for the fortnight ended July 2, aggregate deposits registered a rise of about Rs 1,15,000 crore, which has made the central bank say the increase in off-take of credit has begun to be reflected in deposit growth.

Loan growth picks up for private banks
Private and foreign banks, which experienced slack loan growth in the previous financial year, are now seeing a revival of credit flow in the last one year. According to the RBI report, private sector banks registered 21.7 per cent loan growth for the year to July 2, compared with 3.8 per cent recorded for the year to July 3, 2009. Foreign banks, which experienced decline in loans by 7.2 per cent in the year-ago period, have seen a growth of 12.8 per cent during the latest period under review.

Overall, bank credit growth was 21.7 per cent for the year to July 2, in line with the central bank’s projection of 20 per cent loan growth for the current financial year. Public sector banks continued to lead the growth with 22.4 per cent loan off take which, according to the banking regulator, was “most stable”.

“Besides strong economic activity, credit raised by telecom companies to pay for the 3G and broadband wireless access (BWA) spectrum contributed to the high rate of credit growth observed during the quarter,” RBI said.

Still, the central bank noted that, though credit flow to the industry had improved, the flow was yet to be broad based. Industry absorbed 57.9 per cent of incremental non-food credit in May, compared with 47.4 per cent in the corresponding month of the previous year.

The share of incremental non-food credit to micro and small enterprises declined to 11.9 per cent in May, compared with 16 per cent in May 2009. Loans to real estate dropped sharply for the year ended May 21 to 1.2 per cent from 54.9 per cent a year ago. Loan flow to housing sector improved to 9.6 per cent, compared with 5.7 per cent, while credit card outstanding fell 27.4 per cent compared with a growth of 1.4 per cent in the previous year.