Berating the banking sector for its inability to reduce interest rates, the Economic Survey said borrowers are looking at optional and low-cost funding sources while cash-rich banks are keeping their excess money with the Reserve Bank of India.
The pre-Budget statement about India’s financial health said, “The transmission of monetary policy measures (geared towards reviving economic growth momentum) continues to be sluggish and differential in its impact across various segments of the financial markets”.
The RBI has been reducing its policy rates since the eruption of the worldwide financial crisis in September 2008. However this did not lead to rapid growth in the credit market. This is because the slight reduction in the banks’ lending rate was insufficient to speed up the demand for bank credit.
This made borrowers turn to optional sources of low-cost funds, to fulfill their financial needs while banks having excess liquidity deposited their extra liquidity with RBI.
Borrowers, mainly corporate are looking at optional funding sources like issue of debt securities, FDs and equity markets. However these sources are riskier than bank credit.
The survey showed that the deposits grew faster than the bank credit. While loans to agriculture increased, loans to industry, personal loans and services slowed down.
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