Banks flush with cash but wary of aggressive loan push

Credit growth still in single digits despite sharp interest rate cuts

- MANOJIT SAHA

A few days back, a higher-rated PSU got a short-term loan of ₹1,000 crore from a public sector lender at 6.10 per cent. While it is normal for better-rated entities to get a sweeter deal from lenders, this rate surprised many market observers as it would barely cover the bank's cost of funds.

The reason for short-term rates to fall this low is the huge surplus liquidity in the banking system, that has averaged ₹3 trillion since the start of June, and even topped ₹4 trillion on some days. And this is expected to persist over the next few months as banks' cash reserve ratio (CRR) requirements are also to be reduced by 100 basis points (bps) in phases, starting September.

The CRR cuts would push liquidity levels to as high as ₹5 trillion by November-December, assuming neutral impact from foreign exchange operations, reckoned Gaura Sen Gupta, chief economist at IDFC FIRST Bank.

Meanwhile, a mid-sized public sector bank with lots of headroom to lend, decided not to extend a loan to a large NBFC with significant presence in the microfinance sector that is facing headwinds. Bank loans to NBFCs have contracted 0.3 per cent on a year-on-year basis till May, as compared to a 16 per cent growth recorded last year.

In fact, banks' overall loan growth is yet to pick up despite a 100 bps cut in the policy repo rate by the Reserve Bank of India (RBI) since February. Credit growth dropped to 9.6 per cent year on year till the fortnight ended June 13, as compared to 19.1 per cent a year back. Credit growth for industry has slowed sharply to 4.8 per cent from 9.4 per cent last year mainly due to a slump in credit flows to large industries.