The government’s 8 November decision to ban high-value notes has not only caused a cash crunch but also hit business activity and, in turn, slowed banks’ credit growth.
Data released by the Reserve Bank of India show that the gross credit outstanding of scheduled commercial banks declined 1.58% in November on a month-on-month basis to Rs 65.99 trillion. The data covers the loans disbursed between 29 October and 25 November.
The data also show that banks’ credit outstanding fell in all major sectors in the four-week period ended November 25. For instance, gross credit to microlenders dropped 22% sequentially, the steepest fall across sectors.
In industry, gross credit to micro and small enterprises declined 3% and to medium enterprises fell 5% on a month-on-month basis.
The data is in line with other indicators that point out a drop in industrial activity after demonetisation of high-value notes.
India’s factory activity shrank in December as the cash shortage hurt output and demand, a survey showed on Monday. The Nikkei/Markit Manufacturing Purchasing Managers’ Index fell to 49.6 in December from November's 52.3. This is the first reading below the 50 mark that separates growth from contraction since December 2015.
However, credit growth could inch up in coming months as banks—flush with cash after the demonetisation—have started reducing interest rates. State Bank of India, ICICI Bank, HDFC Bank, Punjab National Bank, Oriental Bank of Commerce, Andhra Bank and Dena Bank are among the lenders that have cut interest rates in the past few days to boost lending.
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