Number game

New Delhi, Feb. 27: Appropriate safeguards are required to prevent erosion of credit quality in the wake of high offtake of advances from the banking sector, the Economic Survey said today.

It also said high credit offtake may exert upward pressure on interest rates.

“Excessive credit growth without adequate safeguards could lead to some erosion in credit quality. Policy, therefore, has to strike a balance between credit quality and the associated risks, while allowing bank lending to contribute to higher growth and efficiency,” said the survey.

It said in view of a rapid growth of bank credit, there might be a need for further capitalisation of banks and developing strict management techniques and methods for the prudent evaluation of investment proposals.

Net domestic bank credit has registered a growth of 14.4 per cent in 2005-06 so far and stood at Rs 23,32,326 crore on January 20, 2006 compared with Rs 19,84,330 crore on the same date last year.

The survey, however, pointed out that despite the steady increase over the years, the credit-to-GDP ratio in India is much lower than that in several advanced and emerging market economies.

“This suggests that financial deepening is still low in India and could improve further with the development of the financial sector,” it said. The credit-to-GDP ratio stood at about 40 per cent in March 2005.

The survey also struck a note of caution about the volume of non-performing assets (NPAs) of non-banking financial companies (NBFCs). After registering a steady decline for three years since 2001, net NPAs of NBFCs increased significantly to 3.4 per cent of credit exposure in March 2005 from 2.4 per cent of credit exposure in March 2004.