What SBI’s deposit rate cut says about the economic recovery

State Bank of India’s (SBI’s) long-term deposit rate cut is another indication that the markets may be leaping too far ahead in discounting an economic recovery. SBI executives made the usual round of television studios explaining the cut: sufficient liquidity in the inter-bank money market, a slight slowing of inflation and the fizzling out of credit growth.

The increase in credit in the year-ending 5 September is just 55% of the rise in deposits. This indicator called the incremental credit-deposit ratio (ICDR) is at its lowest level in at least 14 months. That’s not surprising considering that credit growth has slipped to 9.68%, the lowest in five years.

Growth has eluded even the top-most banks. SBI, ICICI Bank Ltd, HDFC Bank Ltd and Bank of Baroda have all seen their ICDR fall at the end of June quarter. If anything, this yardstick would have worsened during the current quarter, as the aggregate industry numbers show.

Yes, there could be alternative sources of fund raising. However, external commercial borrowings, too, are slowing down (data till March 2014) and private debt placements in the June quarter from non-financial private sector firms were down from a year ago. Fund raising from share sales that have taken place so far has been initiated by highly indebted companies that wanted to retire some loans.

Despite a number of clearances at the governmental level, there doesn’t seem to be any real investment activity on the ground. Many projects are still stuck and announcements to build fresh capacity are few and far between.

The other explanation is that banks are warier of lending now, plagued as they are with bad loans. Yes, credit growth is a lagging indicator, but the conclusion remains the same. The economic growth seen in the June quarter seems to be a statistical blip. Sustainable output growth will be a reality only when credit growth accelerates, too.

State Bank of India