Banks cannot rely on central bank money to support credit offtake, says RBI Governor

Inflation: banks can't rely on the central bank's money to support credit offtake, and they need to mobilise more deposits to aid credit growth, according to RBI Governor Shaktikanta Das on Friday.

He said banks have already started to pass on the hike in repo rates to their depositors and the trend is expected to continue.

Banks can sustain and support that credit offtake only if they have higher deposits when there is a credit offtake. They cannot depend on the central bank money on a per-year basis to support credit offtake, they have to mobilise their own resources and funds, Das told reporters at the post policy meeting.

The six-member Monetary Policy Committee MPC increased the repo rate by 50 basis points to 5.40 per cent and decided to withdraw accommodation to ensure inflation stays within the target going forward, while supporting growth.

This is the third hike in a row by the RBI since May this year in its fight against inflation, which has been above the central bank's tolerance band of 4 -- 6 per cent. In June, the consumer price index CPI based inflation was 7.01 per cent.

In May, RBI increased the repo rate by 40 basis points and by another 50 basis points in June.

Many banks have increased deposit rates after these rate hikes.

The RBI's Deputy Governor Michael Patra said there was a very aggressive deposit mobilisation starting with the bulk deposits.

Patra said we expect deposit mobilisation to catch up with the credit very soon.

In the fortnight ended July 15, bank credit grew 12.89 per cent and deposits by 8.35 per cent.

The impact of the rate hike will be passed on by banks to deposit rates, according to Das.

The trend has started. In the past few weeks a number of banks have increased their deposit rates, and that trend will continue, he said.

The Governor said that the RBI will do two-way operations to deal with the prevailing liquidity situation.

He said last month there was a sudden squeeze on liquidity for around three to four days because of very high GST and other tax collections, and that the RBI has done a fine tuning operation of injecting repo of three days maturity.

He said that the effort will be to make sure there is adequate liquidity.

When asked whether there was a concern about higher amounts on bad loans written off by banks, compared to recoveries and upgradation, Deputy Governor M K Jain clarified that these were technical and prudential write-offs without the right to recovery.

Jain said that all of the loans are fully provided for and reflect the prudence and better position of the balance sheet.

In the last two and a half years, there has been a declining trend as far as write-offs are concerned and there is a rising trend of upgradation of non-performing loans.