Credit Conundrum

With consumption trends muted, bank credit growth is unlikely to turn around this fiscal

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The deluge of liquidity and lower policy rates notwithstanding, bank credit growth remains subdued. Loans from banks grew at 9.5% in May, slower by about 2 percentage points than in March. Also, lending to non-banking financial companies (NBFCs) has moderated to -0.3% year-on-year (y-o-y) in May from 2.9% in April even though the curbs on risk weights have been lifted. Given that transmission is relatively faster for commercial paper (CP) and bonds, rather than for NBFCs and companies where the adjustment of rates takes time, money is moving to CPs and bonds. The stock of bonds and CPs is estimated to have gone up by ₹0.5 lakh crore and ₹1.1 lakh crore respectively in the June quarter. There is clearly some degree of disintermediation at play, much like deposits where savings have moved to equity products, robbing banks of cheaper resources and driving up their cost of funds.