Credit growth shown by banks is largely due to oil marketing companies (OMCs) borrowing and if this borrowing comes down credit growth can even become negative. OMCs have been borrowing heavily due to the losses suffered from selling fuel at prices lower than factory gate prices. OMC borrowing had crossed Rs 115,000 crores as of June 2011, almost doubling over the last few months due to the sharp rise in crude oil prices. Brent crude prices had gone up by 25% over the last six months and the government until the 24th of June had not raised fuel prices to pass on the oil price rise. OMCs suffered from the government’s dilly dallying as the government was not compensation them for their losses and they had to borrow from the system to make up the shortfall.
The fuel price hike and the custom duty cut by the government and the fall in crude prices is beneficial to the OMCs. Government actions have brought down the borrowing bill of the OMCs by Rs 50,000 crores while the sharp fall in oil prices with Brent crude falling by 20% from highs over the last few months will help OMCs in reducing losses. Lower borrowing by OMCs will bring down credit growth further, leading to a falling incremental credit deposit ratio (ICDR) and higher system liquidity. This is positive for bond yields as banks will buy bonds with their excess liquidity.
RBI’s credit data shows that credit has grown by Rs 24,000 crores fiscal year to date (1st April 2011 to 3rd June 2011). In the same period deposits have grown by Rs 53,000 crores, which takes the ICDR to 45%. ICDR was running at over 100% in the early months of this calendar year. The ICDR is the ratio of growth in deposits to growth in credit. If credit growth is running higher than deposit growth, banks are actually drawing down on cash surpluses or selling investments or borrowing from the RBI to fund the credit growth. On the other hand if deposit growth is running higher than credit growth banks have surplus liquidity, which they use to buy bonds or keep it in liquid instruments.
Credit growth on a year on year basis has come down from 23.5% levels seen in the beginning of this calendar to levels of 21% as of June 2011. On an absolute basis credit grew by Rs 47,000 crores in the period April to June 2010, almost double the growth seen in same period in 2011. Last year also saw credit growing by Rs 115,000 between June and July after the auction of 3G spectrum licenses.
The sharp fall in credit growth on a year on year as well as on a fiscal year to date basis is due to the effects of monetary tightening and scam related issues. The RBI has raised policy rates by 275bps over a 15 month period leading to lending rates moving higher. Banks have also tightened lending policies especially to sensitive sectors such as telecom and real estate after the 2G scam broke out in November last year. The country’s largest bank, the State Bank of India (SBI) has increased provisioning for bad loans in the fourth quarter of fiscal 2010-11. SBI has also brought down its credit growth target for 2011-12 from 20% levels to 17% levels on worries of bad loans. Credit growth is expected to fall further on lower borrowing by the OMCs. Bond yields will benefit from falling credit growth but it does not augur well for the economy.