Bank lending could remain subdued despite low rates

Bank lending rates are likely to remain low for a few more quarters as deposit growth remains double that of the loans growth amid subdued demand from the corporates.

The addition in deposits at Rs.13.4 lakh crore over last 12 months ended May 21, 2021, was more than double the Rs. 6.1 lakh crores of credit outstanding during the same period data from the RBI shows. While demand may be muted, banks are also unwilling to cater to the lesser rated credits to avoid future bad loans.

Despite the low base effect of the previous year -as the country was in a complete lockdown last year- the credit growth grew at a slower pace compared with the same fortnight in FY’20.-6,3 per cent. This could be due to risk aversion and regional lockdown imposed by states this year to curb the spread of coronavirus amid the second wave of the pandemic in April and May.

” Though the interest rates (monthly fresh loans WALR) of SCBs have reduced by 42 bps from April 2020 to April 2021, the overall credit growth continued to remain subdued due to risk aversion and continued parking of excess liquidity with RBI” said a report by

.

Loan growth for FY’22 is likely to remain in low double digit on the back of the outbreak of the second wave and its impact on the overall economy. But the various government initiatives could keep bank loan books growing. The ECLGS scheme has been extended till September 2021, and disbursements could continue till December 31.

Credit growth lags far behind the growth in deposits which could keep interest rates low, going by the simple demand-supply mechanics. “Since June 2019, it has been observed that the additions in deposits has always exceeded the addition in credit outstanding” Care said.

The bank credit growth has remained at 6.0%. But for the various initiatives by the government and RBI, since the pandemic induced lockdowns since March 2020, this growth would have been still lower.