The coronavirus outbreak has led to various issues in our economy over different sectors and it also led to an uncommon surge in the currency demand along with the slowing in total deposits reported by our Central Bank of India in its annual report for 2019-2020. The credit growth was considerably decreased and deceleration occurred in major sectors. Even the growth slowed in housing loans and credit cards outstanding, but there was an extraordinary acceleration in the growth of vehicle loans during this fiscal year.
There was a rush to cash situation seen everywhere due to the pandemic hit and the currency-GDP ratio rose to its pre-demonetization level of 12 per cent in FY 2020 from the 11.3 per cent a year ago which represents the increase in cash intensity in our economy which is stated by Reserve Bank of India in their report. The scenario is with an unusual rise in month-over-month (m-o-m) difference during March-June 2020 regarding the consistent period in previous years.
The more intensified cash demand was experienced during the month of May at close to Rs 1 lakh crore, as against the Rs 20,000 crore in May 2019. The deposits of banker’s towards RBI declined by 9.6 per cent in FY 2019-20 as against the rise of 6 per cent in the last year, reflecting subdued deposit mobilisation and the decline in the cash reserve ratio (CRR) to 3 per cent for the period of one-year, effective March 28. As the sectors are slowing down, expansion is not happening which is the ultimate reason for least credit growth.
The central bank in many meetings decreased the interest rates for addressing the crisis due to lockdowns and a general slowdown can aggravate many serious issues. The currency-deposit ratio at 16.3 per cent by the end of March 2020 went above the decade average of 15.1 per cent. The pandemic hit created and changed the preference of people in holding more cash to curb the uncertainty is the reason for the sudden increase in the pace of expansion in currency and also the rise of the currency-deposit ratio.
The demand for credit is declined across all industries, away from non-bank sources and moved towards the banking system to meet the sudden funding requirements reported by Reserve Bank of India. Credit towards the services sector loses speed sharply, mainly driven down by a slowdown in the credit growth to non-bank lenders and financial institutions, on account of worries relating to the health of the sector overall. There was also a sharp deceleration seen in the credit to the trade segment. Personal loan growth slowed moderately.
