Credit growth of the banking system at 10.9% year on year as of August 2014 is the lowest seen since 1996-97. The period 4th April to 22nd August 2014 saw credit growing by Rs 306 billion, a fall of 83% from the same period last year when credit grew by Rs 1830 billion. Deposits on the other hand grew by Rs 1177 billion leading to the Incremental Credit Deposit Ratio at levels of 26% in the April-August 2014 period.
Banks investments in government bonds including state development loans has grown by Rs 2729 billion fiscal year to date indicating banks are preferring to buy risk free bonds than take on credit risk. The SLR (Statutory Liquidity Ratio) cut of 100bps by the RBI since June 2014 has not led to banks increasing credit to the economy.
The sharp slowdown in credit growth is attributable to two factors a) Risk aversion by banks in lending to the corporate sector and b) Oil companies slowing down on credit offtake on falling under recoveries in selling Diesel. Under recoveries have fallen from over Rs 14 to Rs 0.08 over the last one year.
Banks are reeling under bad loans that have grown at over 25% CAGR over the last five years. The Bhushan Steel scam where company officials colluded with a bank to hide bad loans has hit banks hard with Rs 400 billion of loans falling under the specter of default. Bhushan Steel market cap has collapsed by over 75% and at Rs 25 billion is dwarfed by debt of Rs 400 billion.
Bankers are afraid to lend to the corporate sector and that is reflecting in lack of credit growth. Consumers too are not taking up too much of loans as seen by negative consumer durables growth of 10% in the April-June 2014 period. Home loans too have not taken off given high prices that are making real estate unaffordable to the salaried class.
Government bond yields fell week on week with the benchmark ten year bond, the 8.40% 2024 bond, seeing yields fall by 5bps to close at levels of 8.52%. Lack of credit growth will see strong demand for government bonds by banks and with the government lowering supply by Rs 160 billion in the first half borrowing, bond yields should trend down further.
OIS market saw the yield curve staying almost flat week on week. One year OIS yield stayed flat at 8.46% levels while five year OIS yield fell by 1bps to close at levels of 8.03%. Expected liquidity tightening in September on advance tax outflows will keep one year OIS yields at higher levels while government bond rally will bring down five year OIS yields.
Liquidity eased sharply last week on government spending. Liquidity as measured by banks bids for LAF (Liquidity Adjustment Facility) repo, reverse repo and term auctions, banks drawdown from MSF (Marginal Standing Facility) and Export Credit Refinance was at deficit of Rs 174 billion last week, from Rs 802 billion deficit seen in the week previous to last. Liquidity deficit will trend up on advance tax outflows in mid September.