RBI asks banks to link credit expansion with deposit growth

The Reserve Bank of India (RBI) Tuesday asked banks to ensure that there was no mismatch in the expansion of credit and collection of deposits.

Mumbai: The Reserve Bank of India (RBI) Tuesday asked banks to ensure that there was no mismatch in the expansion of credit and collection of deposits.

"Credit expansion in the recent past has been rather sharp, far out-pacing the expansion in deposits. Rapid credit growth without commensurate increase in deposits is not sustainable", RBI Governor D Subbarao said today after the Third Quarter Review of the Monetary Policy.

Expressing serious concern over banks pushing up their lending even when their deposit collection was faltering, he said RBI would monitor the credit growth and "if necessary, engage with banks which show an abnormal incremental credit-deposit ratio".

RBI had to initiate measures recently to increase liquidity in the system as the growth in bank deposits was about 16 percent against credit growth of about 24 percent.

The review statement said that during the quarter, up to mid-December, banks mobilised Rs 88,514 crore of deposits and lent out Rs 2,14,638 crore. However, with active deposit mobilisation in the second fortnight of December, the mismatch has narrowed, it said.

Subbarao said that while RBI would extend liquidity support to meet the productive credit requirements, it is important that there is moderation in the credit growth.

There is limit to what the RBI can do to ease liquidity. Credit and deposit growth of banks has to be aligned, he said.

Heads of commercial banks at the policy meeting Wednesday indicated their willingness to align credit growth with that of deposit growth, the Governor said.

However, some banks pointed out that financing the infrastructure sector was a major source of asset-liability mismatch and there is a need to incentivise raising of long-term resources by banks through appropriate fiscal measures, he added.

The Governor also mentioned that for the monetary policy to be effective, fiscal consolidation is important and containing inflation is the shared responsibility of RBI and the government.

According to the Governor, the commodity prices pose significant risks for fiscal consolidation in the year ahead.

The efficacy of further fiscal adjustment will be influenced by the firming trend in commodity prices and the extent to which government will allow this to pass through to consumers, he said.

Meanwhile, referring to queries on investigations in Citibank fraud and whether the RBI was planning any measures with regard to regulating wealth management services offered by banks, the RBI has said that it would decide course of action after full picture emerges from the investigation.

RBI has also decided to call state governments for discussion on Malegam committee report on microfinance institutions.

The Governor also mentioned that for the monetary policy to be effective, fiscal consolidation is important and containing inflation is the shared responsibility of RBI and the government.

According to the Governor, the commodity prices pose significant risks for fiscal consolidation in the year ahead.

The efficacy of further fiscal adjustment will be influenced by the firming trend in commodity prices and the extent to which government will allow this to pass through to consumers, he said.

Meanwhile, referring to queries on investigations in Citibank fraud and whether the RBI was planning any measures with regard to regulating wealth management services offered by banks, the RBI has said that it would decide course of action after full picture emerges from the investigation.

RBI has also decided to call state governments for discussion on Malegam committee report on microfinance institutions.

PTI

Tags: