With signs of slowdown in credit growth emerging in the April-June quarter, top bankers' have sought a breather from the Reserve Bank of India in the current rate hike cycle.

At the pre-monetary policy consultation meeting at the RBI on Monday, bankers made a case for a pause by pointing out that the industrial output growth in May was the slowest in nine months.

According to Mr M. D. Mallya, Chairman, Indian Banks' Association, there is definitely a slowdown in new loan sanctions. In the reporting quarter, credit offtake from banks was relatively slower at Rs 1.44 lakh crore against Rs 1.63 lakh crore in the corresponding year- ago period. The industrial output in May rose 5.6 per cent against 8.5 per cent in May 2010.

The central bank has hiked interest rates 10 times since March 2010 to stave off rising inflationary pressures.

Tight monetary policy and high inflation were dampening growth impulses in the economy, bankers said.

Notwithstanding bankers' contention about tepid demand for credit and the slowdown in IIP numbers, the central bank is likely to persist with rate hikes as inflation continues to be high, say economists. The annual inflation rose to 9.44 per cent in June against 9.06 per cent in May 2011.

The RBI, in the June Mid-Quarter Monetary Policy Review, said its monetary policy stance remains firmly anti-inflationary, recognising that, in the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control.

The case for another rate hike (of 25 basis points) in the first quarter review of Monetary Policy on July 26, 2011 becomes stronger, especially as there are signs that inflation may continue to be rigid in the downward direction, said Care Ratings in a report.

“Credit growth, on a year-on-year basis as well as year-to-date basis, is reasonable. The year-on-year growth in credit is at 19 per cent. But if one were to look at the sanctions, there is a definite slowdown in the new projects pipeline,” said Mr Mallya, who is also CMD of Bank of Baroda.

Last year, there was good demand for credit as many infrastructure projects in the power and roads segments were implemented. But this year there are fewer projects.

Credit demand, according to Mr Mallya, has not been impacted as of now. But it could, going ahead. “We have to see how the projection of 19 per cent growth in credit will be met for the full financial year. It depends on how long the incremental deployments to old projects will continue,” said the IBA Chief.

Banks also informed the RBI that asset quality, especially in the small and medium enterprises segment, could come under pressure because of slowdown in demand and the overall high interest rate scenario.

Deposit growth

Deposit growth, according to Mr Mallya, is reasonable with the year-on-year growth being around 18 per cent, against 15 per cent last year.

However, there is tremendous pressure on CASA (current and savings account) deposits due to migration of savings bank deposits to term deposits on account of higher interest rates. Net Interest Margins, too, could come under pressure due to the rising interest rates.

Though banks are for deregulation of the interest rate on savings bank deposits, bankers told the RBI that the time was not yet ripe for such a move in view of the high interest rates prevailing in the banking system.

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