Banks reluctant to lend aggressively amid liquidity glut

Even after a 100 basis points reduction in the Reserve Bank of India’s (RBI) policy repo rate since February, credit growth remains sluggish

A short-term loan of Rs 1,000 crore was recently extended to a top-rated public sector undertaking (PSU) by a public sector bank at an interest rate of just 6.10 per cent. Although such favourable terms are common for creditworthy borrowers, the unusually low rate—only marginally higher than the lender’s cost of funds—surprised many market analysts.

According to a Business Standard report on Thursday, the primary reason for such low short-term rates is the substantial surplus liquidity in the banking system, which has averaged around Rs 3 trillion since early June and even crossed Rs 4 trillion on certain days. This surplus is likely to persist in the coming months as the cash reserve ratio (CRR) for banks is set to be reduced by 100 basis points in phases beginning September.

As per the BS report, Gaura Sen Gupta, chief economist at IDFC FIRST Bank, estimated that the CRR cuts could boost liquidity to as much as Rs 5 trillion by November-December, assuming no significant influence from foreign exchange operations.

Despite this surplus, banks remain selective. A mid-sized public sector bank recently declined a loan request from a large non-banking financial company (NBFC) facing prolonged pressure on its financial performance. Bank credit to large NBFCs has already contracted by 0.3 per cent year-on-year up to May.

Even after a 100 basis points reduction in the Reserve Bank of India’s (RBI) policy repo rate since February, credit growth remains sluggish, the report added.

For the fortnight ending June 13, overall credit growth dropped to 9.6 per cent, down from 19.1 per cent a year earlier. Industry credit growth, in particular, has slowed sharply to 4.8 per cent from 9.4 per cent last year, largely due to reduced lending to large industries.