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Survey: maintain credit offtake to facilitate economic growth

Ashok Dasgupta

Advice to banks as credit-deposit ratio falls

NEW DELHI: Expressing concern over the current slowdown in economic growth at 8.7 per cent, the Economic Survey has advocated that adequate bank credit be made available “at a reasonable cost” to tide over the deceleration.

Even as public sector banks announced cuts in lending rates in recent days in deference to Finance Minister P. Chidambaram’s indications, the Survey suggested that they reduce rates by way of a squeeze in their spread. In effect, the banks have been advised to narrow down the difference between the lending and deposit rates.

The banking sector should “review the spreads suitably, thereby ensuring that credit offtake by the productive sectors is maintained, facilitating the growth momentum of the economy”.

The Survey said: “It is necessary that credit expansion is non-inflationary and the productive sectors receive adequate credit at reasonable cost.”

The advice to banks is significant in view of the fall in the credit-deposit ratio, from 74 per cent as on March 31, 2007 to 71.8 per cent as on January 4 this year. Any further deceleration in credit provided by the banks “would have a detrimental impact on the overall economic growth.”

The Survey attributed the slowdown in credit availability to the policies of the Reserve Bank of India. “The RBI’s policy initiatives have reduced credit growth sharply during the current year, with the SCBs’ (scheduled commercial banks) credit growing by only 21.5 per cent till January 4, 2008, compared to 30.8 per cent on January 5, 2007.” In fact, non-food credit (lending to commercial sector) was well below the indicative target of 24-25 per cent set for the current fiscal.

The Indian economy entered a higher growth trajectory and, therefore, the investment demand was expected to remain strong in the short-to-medium term. During the current fiscal, there was a spurt in investments under SLR (statutory liquidity ratio) norms on account of higher deposit mobilisation by banks.

Turning to the issue of bank credit to sensitive sectors during 2006-07, the Survey said the realty sector accounted for a very high share of 91.9 per cent of the total lending although the sensitive segment also included capital market and commodities.

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