The Reserve Bank on Tuesday said incentivising the flow of funds at affordable rates can rekindle investment and push credit growth which had decelerated even before the COVID-19 crisis.
Credit offtake from banks was muted during 2019-20, growing at 6.1 per cent annually, in a sharp loss of pace from 13.3 per cent a year ago and from the recent peak of 15.0 per cent in December 2018.
Even as monetary and credit conditions moderated through 2019-20, the COVID-19 pandemic led to an unusual surge in currency demand, along with deceleration in aggregate deposits, RBI said in its annual report.
Pointing out that credit growth weakened during the year, with deceleration in all major sectors, the RBI said it proactively managed liquidity conditions through conventional and unconventional measures.
“Going forward, surplus liquidity conditions, coupled with policy rate reductions, are expected to instill confidence, easing financial conditions and incentivising the flow of funds at affordable rates so as to rekindle investment and lay the foundations of strong sustainable growth as the COVID-19 curve flattens and the economy repairs and revives,” it said.
Credit demand has been ebbing away across all sectors, despite the post-IL&FS shift among large borrowers, including non-banking financial companies (NBFCs) and housing finance companies (HFCs), from non-bank sources and towards the banking system for meeting funding requirements, it said.
The unabated weakening of economic activity, coupled with deleveraging of corporate balance sheets and risk aversion by banks due to asset quality concerns, was accentuated by the pandemic woes, producing a reduction in the incremental credit-deposit ratio, it said.
The credit-to-GDP gap remained wide during 2019, reflecting the slack in credit demand, it noted.
Data on sectoral deployment of bank credit for March 2020 point to a broad-based slowdown, it said, adding credit growth to agriculture and allied activities, and industry — mainly large and medium units — decelerated in 2019-20.
However, it said credit growth to micro and small industries accelerated.
With regard to Currency in Circulation (CiC), the report said there was an unusual rise month-over-month (M-o-M) during March-June 2020 vis-a-vis the corresponding period in previous years.
“The year ended with a surge in pandemic-related rush to cash. Overall, CiC growth of 14.5 per cent was slightly lower visa-vis 16.8 per cent a year ago, however, the currency-GDP ratio increased to its pre-demonetisation level of 12.0 per cent in 2019-20 from 11.3 per cent a year ago, indicating the rise in cash-intensity in the economy in response to the pandemic,” it said.
Many economies, especially in the emerging world, where the virus has spread rapidly, experienced the phenomenon of rising cash in circulation.
Cross-country monetary statistics indicate that the increase in currency in circulation was particularly sharp in Brazil, Chile, India, Russia and Turkey, as also in advanced economies such as the US, Spain, Italy, Germany and France, where the use of cash is less, it added.
“The rise in currency in circulation in these countries occurred concomitantly with liquidity injecting measures undertaken by their central banks. They were also impacted by the COVID-19 build-up of precautionary balances,” it said.