Though the economy is facing two-digit inflation, tight liquidity and high interest rates, banks' loan growth has not been affected by the challenges. There are more loan takers now as compared to last year, when the rates were relatively low.
The borrowers are demanding more loans despite of the high interest rates. This is antagonistic to the usual trend, when banks borrowing decline due to rise in interest rates.
Since the first quarter of current fiscal, banks have extended fresh loans amounting to Rs 1,29,334 crore against their lending of Rs 44,949 crore during the same period a year ago. The benchmark lending rates - prime lending rate (PLR) - of the banks are also ranging between 13.25% and 14% compared with a range of 12.75% and 13.25%, a year ago.
The banks loan portfolio is seeing a hike because the credit crunch has made it difficult for domestic companies to raise funds from abroad. Besides the capital market door is also blocked for many as the stock market has virtually closed. Thus these situations have left no option for borrowers but to depend on banks.
Banks have although slowed down their retail loans but the overall loan growth is constantly rising. The money supply in economy rises with an increase in credit growth and thereafter raises the inflation level. India's money supply growth has crossed RBI's year-on-year zone of 17% and touched 21%.
The central bank that aims to achieve its projected medium-term inflation target of 5-5.5% by March 2009 may not be able to reach its target if the money supply growth increases. Inflationary pressure would rather rise in such a scenario. The current level of inflation has also forced RBI to adopt a tight monetary policy.
In fact banking companies' results on loan growth of second quarter of current fiscal are likely to get a boost of over 25%. Banks are also following the strategy of improving the credit-deposit ratio. For instance, the credit-deposit ratio stood at 70% in August 2007 has been improved to 73% on August 2008.
Axis Bank and HDFC Bank are likely to top the pack of private banks in terms of growth. However this growth is expected on back of strong growth in the loan book. Among PSU banks, Bank of India leads the pack with 35% expected profit growth on the back of high loan growth and lesser costs. This shows the bank is maintaining its last year's momentum.
Loan growth in the banks may pose a problem for the economy in terms of rising inflation but at the same it is helping banks in overcoming their mark-to-market losses.