Banks see a substantial slowdown in credit demand
By Joseph Samson
Dec 27, 2007
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New Delhi: Reserve Bank of India (RBI) has pointed towards a slowdown in credit demand for this financial year. According to RBI the credit demand grew by just 7.6% this year as compared to 11.7% over the previous year. Most of the banks including the public sector banks will miss credit growth targets with big margins this year.

For public sector banks the finance ministry defines the targets based on 16 parameters, which are called the statement of intent (SoI). Public sector banks are unlikely to meet credit growth targets set by the government for this fiscal year. At the beginning of every financial, the finance ministry spells out a target on 16 parameters for PSU banks, referred as statement of intent (SoI).

Despite the festive discounts offered by various public sector banks especially the State Bank of India (SBI) on home loans and other retail loans, the growth in credit demand is likely to be sluggish during the last quarter also. A senior official of public sector bank said, “Though we are well into the busy season, the credit offtake has lagged behind compared to last year. No miracles are expected, even though corporates have initiated their capex plans. In any case, growth in advances cannot be immediate. A slowdown was anticipated in wake of recession fears in US, but it will have a marginal impact.'

RBI's decision to reduce the cash reserve ratio (CRR) by 50 basis points has caused a pressure on the liquidity situation and smaller banks are finding it difficult to procure funds. The pressure on margins has increased because the banks haven't raised the interest rates on various loans fearing a further decline in credit off-take. Keeping in view the slowdown, some banks approached the Ministry of Finance for a downward revision in the credit growth targets to around 20% but RBI didn't relent and kept them at the same levels.

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