Date:02/11/2006 URL: http://www.thehindubusinessline.com/2006/11/02/stories/2006110203940100.htm

Back `Some credit growth is okay'

Our Bureau

Reddy for deposit-credit balance

The discomfort will be less if there is a better balance between deposits and credit on the one hand in the banking system and in a more general sense between savings and investment.

Mumbai , Nov. 1

For the moment the Reserve Bank of India seems to have eased up on the idea of tempering credit growth. Some three months ago, the central bank had advised bankers to take a quiet look at demand growth for credit and, if possible, manage it at around 20 per cent, as against over 30 per cent in the last three years.

The RBI now wants banks to balance credit growth with deposit growth and also ensure credit flow to desirable sectors.

Bankers are not sure whether the present shift in RBI's stance has been at the Finance Ministry's instance, which in recent months has been favouring lower interest rates to stimulate credit growth.

Growth in credit

The RBI Governor, Dr Yaga Venugopal Reddy, thinks that some growth in credit is okay even as the emphasis is now on using deposit growth to contain credit disbursals.

"We have a reassessment (on credit growth), and it is still higher for any comfort. It would be better to moderate the credit, but may not be as close as 20 per cent. What we are trying to say is that some credit growth is okay. It is still good to be moderating. The discomfort will be less if there is a better balance between deposits and credit on the one hand in the banking system and in a more general sense between savings and investment."

Bank credit has been growing more than 30 per cent in the last three years. According to the RBI, there is a high growth in credit to housing, to commercial real estate and retail consumers. Against this background, it is critical for the central bank to look for early signs of overheating, Dr Reddy told Business Line, after presenting the credit policy on Tuesday.

As of now, there is no conclusive evidence of overheating. An overheating economy is one which is growing rapidly and whose productive capacity cannot keep up with the resulting demand pressures. Given the current level of high growth rate and rising inflation, policy makers have to look for symptoms of overheating, said Dr Reddy.

On inflation, he said that given the current global and domestic circumstances, an inflation of 5-5.5 per cent for the current year seems to be a reasonable expectation. However, there are some inflationary pressures that require active policy management to ensure the 5-5.5 per cent range, he said. On the demand side, the RBI has done more in terms of alerting banks to rebalance credit and deposits, and on the supply side it has indicated its expectations that the government will have to manage the supply side of food items.

On financial inclusion — taking banking services to more people — Dr Reddy said there are three aspects to consider: policy commitment — which the RBI has already initiated; procedural enablement — as seen in the simplifying of KYC norms; and third, the banking industry's stand on the commercial aspect of financial inclusion.