Even as banks in India are seeing massive deposits due to Government's demonetisation drive, banks' loan books continue to contract. 

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Reserve Bank of India (RBI) data show that the credit deposit ratio for banking system has declined by almost 337 basis points during the fortnight ended November 25, 2016, to 69.3%.

Nitin Aggarwal, Renish Patel analysts of Antique Stock Broking Limited said, " We expect credit growth to remain in single digit for FY17 (10% y-y growth in FY16) as capex cycle remains subdued while the demonetisation activity may further put pressure on industrial demand in the near term."

It further indicated that the incremental CD ratio (one year) is at its lowest in more than a decade at 30%.

CD ratio means how much a bank lends out of the deposits it has mobilised. 

Since the ban of 86% of currency notes in India on November 8, loan growth remains soft, while deposit growth continue to surge further.

Under the system, bank's credit growth have moderated further to 6% on year-on-year basis. This was because of decline of in the outstanding credit base by Rs 61,000 crore to Rs 72.9 lakh crore during the fortnight ending 25 Nov, 2016.

Till now, the credit base has declined by Rs 2.37 lakh crore (3% FY17 YTD decline), lowest in at least past ten years.

On the other hand, led by demonetisation the deposit portfolio in banking system, has increased by 15% yoy – highest in past few years. In the fortnight, the bank's deposit surge further by Rs 4.02 lakh crore to Rs 105 lakh crore.

So far, the deposit base increased by Rs 7,96 lakh crore while the FY17 YTD deposit growth stands at 8%. 

RBI in its monetary policy announcement, said Rs 11.55 lakh crore had been brought back in the system. While few days later of the policy, it was known somewhat Rs 4.28 trillion has been issued to public.

The analyts said, "While there will be near term overhang on credit growth/asset quality due to demonetisation and moderated GDP growth, for now many private banks are witnessing the improvement in collections and seeing medium term benefits arising from formalization of unorganised sector. "