Banks had reported a lending growth of Rs 7.5 billion in the same period last year.[break]
A quick look at these two figures may not reflect any big change in the situation, but considering the liquidity situation now and last year, the picture of more and more sectors shunning bank lending becomes clear.
In the first two months of Q2 last fiscal year, the deposit collection of commercial banks had gone down by Rs 1.3 billion, exposing the problem of liquidity crunch. This year, the situation is just the opposite: banks are flush with cash, with deposit mobilization in the first two months of Q2 recording a growth of slightly over Rs 15 billion.
The deposit collection by commercial banks shot up this year as more depositors - both individual and institutional - lifted their money from development banks and finance companies and parked them at commercial banks. This was out of fears that these financial institutions might go bankrupt like some of their peers which had started developing holes in their balance sheets due to exposure to bad loans and bad governance, bankers said.
“But the money that has been lifted out of development banks and finance companies has not come to use because there is no demand for credit,” Ashoke Shumsher Rana, CEO of Himalayan Bank, told Republica.
One of the reasons for this is rent-seeking culture in the bureaucracy that has slowed down the government´s capital spending, according to Rana.
Rana told this referring to an exclusive news report that appeared in Republica last week that said the government in the first four and half months of this fiscal year spent a mere Rs 3.93 billion of its capital expenditure budget, as ministers overseeing large-scale development projects started demanding pre-payment of commissions for awarding contracts.
Another reason, as said by Rana, is sour investor sentiment in the country.
This is reflected through the manufacturing sector´s contribution to the GDP, which has now fallen to 6.5 percent from more than 10 percent a decade ago. This means industrial activities in the country have not grown in line with the economy´s growth, denting demand for credit, according to Rana.
One of the reasons for this decline - apart from labor related problems and power cuts - is sluggishness in the real estate market, to which most of the business houses are exposed.
“Since their money is now trapped in the sector and are struggling to clear this debt first, they are not seeking fresh loans,” Rana said.
In addition, the central bank´s instruction to banks and financial institutions to bring down capital-cum-core capital to deposit (CCD) ratio to 80 percent by mid-January 2012 is also dampening demand for credit. This means all banks and financial institutions cannot give away credit of more than Rs 80 for every Rs 100 they get in the form of deposits and core capital.
“Because of this provision, banks became wary about extending too much of credit, fearing they may not be able to recuperate them within the deadline set by the central bank,” Rana said.
Related story
Lending slows as banks focus on recovery of loans at fiscal yea...
