Banking Sector: Credit Drops while Deposits Rise

Banking Sector: Credit Drops while Deposits Rise

Indian government and RBI have been announcing various measures to improve lending to small and medium businesses. However, banks are suffering from high NPA levels and while banks face tough time dealing with loans going bad, it will be difficult for them to offer more credit. The NPA issue has led to decline in advances offered by banks as the loan department staff turns risk averse. RBI has reduced repo-rate by 75 basis points but the data for the fortnight suggests that credit to business and individuals hasn’t picked up.

As per the data released for period ending May 8, 2020, the deposits have gone up by 1,27,226 crore while credit has declined by 21,010 crore. Indian government has this week clarified that the stimulus package announced by Prime Minister Narendra Modi will facilitate loans worth 3,00,000 crore to micro, small and medium businesses. The Finance Ministry has further clarified that these loans will be offered at preferential rate of 9.25 percent. This has been termed as a right step by many economists as Indian lending system suffers from very high interest rates.

The government will take guarantee for the loans disbursed under the new scheme announced for MSME sector. As per RBI data, 50-day lockdown all over India to contain coronavirus infections has reduced demand for fresh loans. Banks have been functioning with less number of working days. While advances for banking sector have declined during the period ending May 8, 2020, the deposits have gone up during the same period.

Finance Minister Nirmala Sitharaman will be meeting public sector bank management to discuss credit situation. Association of Indian Banks has recently sent its recommendations to the government for creation of ‘bad bank’ in order to deal with growing NPA crisis.