High rates reduce demand for loans; new loans by banks fall to four-year low in September

MUMBAI: New loans by banks as a proportion of fresh deposits have fallen to a four-year low this September, indicating investors are flocking to the safety of banks when equity markets are wobbly, and that demand for loans are slowing due to high rates.

Although the so-called credit-deposit ratio has halved to less than 50% from as high as 100% at the beginning of the year, banks do not see any immediate fall in interest rates as they need to attract deposits ahead of huge government borrowing.

"Deposits are growing since the equities market is a little bit subdued and investors are choosing to park their money in safer avenues such as banks," said SBI chairman Pratip Chaudhuri.

Banks have raised Rs 3,22,298 crore as deposits between April and September this year, but lent only Rs1,51,072 crore, data from RBI show.

This translates into a credit-deposit ratio of 46.87%, the lowest in the month of September in four years - an indicator of how lending has slowed down. Indian shares are the worst performing in Asia and had fallen 20% this year, which many call a bear market.

Banks' asset-liabilities are swinging from one extreme to the other as RBI is poised to raise policy rates for the 13th time when it reviews its monetary policy on October 25 as it aims to tame inflation. Its efforts so far have cooled the demand for loans, but higher rates are drawing more deposits, leading to higher cost for banks. But the trend may be better for the system as a whole, since the distortion due to high lending in proportion to deposits was creating risks in terms of mismatches.

"Credit expansion in the recent period has been rather sharp, far outpacing the expansion in deposits. Rapid credit growth without a commensurate increase in deposits is not sustainable," RBI governor D Subbarao had said in his quarterly monetary policy statement in January this year.

Given the nature of the banking business, while deposits are reasonably steady in the initial few months, loan growth is generally slack even during the boom period in a business cycle.

Source: EconomicTimes