Should banks lend more in current scenario?

The reason for the credit crunch is that the incremental credit deposit ratio of banks is as high as 97%. During the June-September quarter, the incremental credit deposit ratio of a number of banks—Andhra Bank, Bank of Baroda, Bank of India, Corporation Bank, Indian Bank, Indian Overseas Bank, Oriental Bank of Commerce, Punjab National Bank and Union Bank to name a few—was above 100%. Year-on-year credit growth is as high as 29%, which makes it difficult to talk of banks not lending.

Yet there is undeniably a liquidity crunch. One reason is the preemption of credit by the oil companies, because of government policy. The year-on-year growth of bank advances to the “petroleum, coal products and nuclear fuels sector” rose by 91.8% in the year to 29 August 2008.

The growth in advances to this sector accounted for one-fifth of all incremental advances to industry between 23 May and 29 August. That means less money left over for other sectors. For example, the incremental credit extended to the infrastructure sector during this period was 8.2% of all incremental credit to industry.

It’s true that the real estate sector is having trouble getting funds. But loan outstandings to the real estate sector went up by 11.7% in the three months between 23 May 2008 and 29 August 2008.

The solution to the problems in this sector lies in bringing down the price of property, rather than in forcing banks to lend.

Loan outstandings to NBFCs (non banking finance companies) rose by 7% in the three months under consideration, over a period during which the growth of gross non-food bank credit was 6.4%.

The drying up of other sources of finance has forced companies to turn to the domestic banking sector for their funding needs, but forcing banks to lend in the current environment will only result in more bad loans.
Reports have come in of a deterioration in asset quality among credit card receivables, but loan outstandings on credit cards went up 9.2% in the three months to 29 August, well above the rate of growth of non-food credit for the banking sector.

Source: livemint