Slowdown in credit off-take in India

Credit off-take has been rapidly slowing down in India since June’08, mainly because of high interest rates (until Oct’08) and banks unwillingness to lend later on. Though the RBI – the central bank of India - has projected 20% growth in the credit off-take for the fiscal year 2009-10, credit growth has slowed down to merely 16.7% in the first quarter of FY10, down from 25% in the same period last year.

But there is some positive news which has come up today regarding the credit off-take in India. The total credit off-take increased 16.3% (y/y) as of 3rd July’09, higher than the 15.1% in the previous fortnight. However, it’s still far below the peak of nearly 30% in Oct’08. But a high base effect is also playing its role in distorting these numbers. Not a problem. Let’s take a look at the monthly growth rates, which could give more insights in the current situation.
Banks' credit growth rate in India

Source: Nomura, CEIC

Well, looking at the monthly growth rates, credit growth seems to be gradually gaining traction; credit growth rose to 1.2% (m/m, s.a.) in June’09, as compared to 0.3% in the beginning of 2009.
Banks have become very reluctant to lend money post Lehman Brothers collapse. They rather prefer putting money with the RBI. There has been excess liquidity in the system for last seven months now, which can be seen by repo liquidity data (see the graph below).

To stop that, the RBI has reduced the reverse repo rate – the interest money banks get for parking their funds with RBI – to 3.25% in April’09, from 6% last year. But the result is yet to be seen. The RBI should take some steps to ensure easy access to funds if it wants to see the country growing at a higher pace. The central bank is going to decide on its interest rate on July 28. Till then, take a chill pill and start snoring.