The first signs of the economy cooling down is showing: the runaway growth in bank loans is finally losing some steam. For the first time in 6 years, banks have recorded an absolute dip in loans given to individuals and Corporates.

Latest RBI figures reveal that aggregate non-food credit extended by banks declined Rs 30,532 crore between April and June 22 to Rs 18,17,955 crore. Though a slow credit demand is normal in the first quarter which is lean season, for the first time in 24 quarters, banks are seeing their loan portfolio shrink. Significantly, it’s happening at a point when deposits parked in banks are recording the highest quarterly growth of over Rs 1,00,000 crore.

The point to note here is that while the deposits are at a record volume – the loan portfolio is reducing – while this is good as far as the FM is concerned because he is achieving the objective of cooling down an overheated economy – the question is what happens to the banks – they will pay interest on the deposit on one hand while on the other hand the loan portfolio
shrinking.
The central bank has given enought indication that it is not comfortable with the fierce loan growth. Since last year, it has implemented series of rate hikes to cool down the economy and diffuse bubbles in various markets. The monetary actions may be finally showing results.

From the corporates side, the corporates are more inclined to borrow from alternative sources which are available at a relatively cheaper rates. But with global PE funds tripping over their feet to fund indian ventures – mid cap segment is gravitating more towards equity.

And anyway equity markets seem to be in a tizzy and spiralling northwards …..

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