A woman holds the loan she has received, a stack of rupee bills. (Photographer: Adeel Halim/Bloomberg)

Loan Growth Plummets After Demonetisation

Banks may be flush with cash after the government’s decision to withdraw notes of Rs 500 and Rs 1,000, but they have nowhere to deploy it.

Loan growth which has been weak for some time now due to the lack of investment in the economy, has plummeted further as demand for consumer credit has also taken a hit in the weeks following the demonetisation decision.

Data released by the Reserve Bank of India (RBI) on Wednesday showed that the growth in total bank credit across all scheduled banks, as on December 9, slowed to 5.76 percent on a year-on-year basis, its slowest this financial year.

“There is no delay in sanctioning of loans, but the actual disbursement is not happening due to the cash crunch,” said Rajnish Kumar, managing director at State Bank of India, in a telephonic interview with BloombergQuint.

Loan Growth Plummets After Demonetisation

The fall in credit growth in not surprising.

The government’s demonetisation decision led to a withdrawal of 86 percent of currency in circulation, which in turn impacted demand for goods ranging from daily use products to consumer durable and two wheelers. A fall in such transactions was bound to hit demand for products like consumer durable loans and auto loans.

The cash crunch, according to Kumar, is not likely to last beyond a month, with the RBI insisting that its printing presses are working at capacity to replace the currency that has been pulled out of the system.

On Wednesday, the RBI said that banks had been provided Rs 5.92 lakh crore in new currency. This is about a third of the Rs 15 lakh crore that was withdrawn from circulation.

While the situation may improve gradually, banks, including SBI, may be forced to revisit their credit growth targets for the year. In August, SBI Chairman Arundhati Bhattacharya had said credit growth for the full year would likely be around 12 percent.

It is likely that 5.76 percent could become 7-8 percent (for the industry) by the end of the year...Post demonetisation there is a slowdown in credit offtake.
Rajnish Kumar, Managing Director, State Bank of India

According to Kumar, auto and housing loans are “holding on”, but there are delays in disbursement. He anticipates that corporate credit will also be hit as companies recalibrate their working capital requirements based on demand.

In a report released on Thursday, Religare Institutional Research noted that old notes may have been deposited in current accounts, in turn hurting loan growth.

We do not see any material improvement in credit growth and expect it to stay under pressure for FY17. Mid-tier PSU banks are likely to grow below the system due to asset quality stress. This should lead to market share gains for private banks, especially mid-tier names...
Religare Institutional Research

Deposit Growth Spikes

While credit growth has slipped, deposit growth has predictably spiked. According to the RBI data, deposit growth rose to 15.9 percent for the fortnight ended December 9 compared to 10.9 percent in the comparable fortnight last year.

Banks have received nearly Rs 13 lakh crore in old currency deposits since November 8. In addition, new currency worth Rs 5.9 lakh crore has been put in circulation. Meanwhile restrictions on withdrawals remain in place. Citizens can only withdraw Rs 24,000 a week from bank branches and Rs 2500 per card from an ATM each day.

The divergence in credit and deposit growth means that the credit-deposit ratio for banks has fallen to 69.3 percent from 75.9 percent at the same time last year, said Religare in its report. The proportion of government bond holdings in the form of Statutory Liquidity Ratio (SLR) has risen to 28.7 percent compared to 27.6 percent last year, the report added.