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RBI cautions on high credit growth

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Deposit mobilisation crucial: Reddy

Mumbai , July 25

The Reserve Bank of India continues to be concerned about high credit growth as seen in the first quarter. Non-food bank credit grew at 32.9 per cent, year-on-year, as against a projection of 20 per cent. Deposits on the other hand grew at 20.7 per cent, compared to last year's 14.9 per cent.

"A more sustainable balance is required between the growth of credit and deposits," cautioned Dr Y.V. Reddy.

The quarterly review of monetary policy released on Tuesday said, "Developments during the first quarter of 2006-07 indicate that money supply, deposit and credit growth are running above the indicative projections, warranting caution by all concerned in this regard."

Dr Reddy said that credit had been expanding at faster rate than deposits in the banking system. "The growth of non-food credit at 30 per cent is very difficult to maintain unless the deposits increase," he said.

While in the case of credit, it is possible to readjust the portfolio between government securities investment in the short-run, the mobilisation of deposits, particularly retail deposits, on a sustainable basis was not possible in the shorter run, Dr Reddy explained.

The way ahead for banks is to make efforts in three directions. They have to concentrate on deposit mobilisation, particularly on retail deposits, they should focus on credit quality and also make sure that credit growth is not too much out of alignment with deposit growth, Dr Reddy said.

On the issue of credit quality, Dr Reddy said, "We have asked banks to ensure credit quality. There has been some recognition among banks and I assume they will continue to impart higher quality in the credit disbursed."

Although in the annual monetary policy in April, RBI cautioned banks about banks lending to sensitive sectors such as real estate, loans to commercial real estate rose by 101.3 per cent in the May to June 2006 period.

On the question of rationalisation of priority sector lending, Dr Reddy said that the central bank had received very conflicting responses. The RBI is now trying to firm up a different, simple and focused model for priority sector lending he said.

"We expect to have a fresh draft circular on rationalised priority sector lending in the next few weeks," Dr Reddy said.

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