Aggregate deposit and credit growth decelerated
IV.11 On the component side, the year-on-year aggregate deposit growth has decelerated. It mainly reflected the underlying trend in time deposits, which constitute around 90 per cent of the aggregate deposit. The moderation in the net financial saving rate of the household sector during 2011-12 partially reflected the slower growth in households’ holding of bank deposits. Moreover, low real interest rates in time deposits and relatively high rate of returns in alternate assets (e.g., gold) might explain some part of the deceleration in time deposits (Chart IV.7). The sharp decline in aggregate deposits at end-Q2 could be due to the decline in deposit rates announced by various banks from September 7, 2012 as well as the advance tax outflow from the banking system. Following the seasonal pattern, the currency with the public also declined in Q2 of 2012-13. Table IV.2: Monetary Indicators | Item | Outstanding Amount (`billion) October 05, 2012 | FY variations (per cent) | Y-o-Y Variations (per cent) | | | 2011-12 | 2012-13 | October 07, 2011 | October 05, 2012 | 1 | 2 | 3 | 4 | 5 | 6 | Reserve Money (M0)* | 14,627.4 | 0.9 | 2.5 | 18.4 | 5.3 | Reserve Money (Adjusted)* | | 0.9 | 3.5 | 18.7 | 12.4 | Broad Money (M3) | 79,118.8 | 7.4 | 7.5 | 16.6 | 13.3 | Main Components of M3 | | | | | | Currency with the Public | 10,545.0 | 4.2 | 2.7 | 13.9 | 11.0 | Aggregate Deposits | 68,554.8 | 7.9 | 8.3 | 17.1 | 13.7 | of which: Demand Deposits | 6,926.5 | –9.1 | –1.7 | –2.8 | 5.4 | Time Deposits | 61,628.2 | 10.4 | 9.6 | 20.1 | 14.7 | Main Sources of M3 | | | | | | Net Bank Credit to Govt. | 25,795.8 | 9.5 | 8.9 | 23.7 | 18.8 | Bank Credit to Commercial Sector | 51,696.0 | 5.6 | 4.2 | 19.4 | 15.6 | Net Foreign Assets of the Banking Sector | 15,462.2 | 11.0 | 0.2 | 14.9 | 0.0 | Note: 1. Data are provisional.
2. *: Data pertain to October 19, 2012. |

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IV.12 Non-food credit growth, which had generally increased during Q1 of 2012-13, has decelerated in Q2. This has been mainly due to the slack investment demand and slowdown in the credit-intensive manufacturing sector. The increased risk perception of banks could also have played a role in the low bank credit disbursement. Despite the positive wedge between the y-o-y growth in credit and aggregate deposit, the wedge between the two narrowed in Q2 compared to Q1 of 2012-13. The decline in the divergence between these growth rates helped contain one of the structural factors causing deficit liquidity in the banking system during Q2 of 2012-13 (Chart IV.8). |

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IV.13 There was a deceleration in credit growth (y-o-y) for all SCBs at end-September 2012. At the bank-group level, the deceleration was particularly sharp for the public sector banks (PSBs). As PSBs are the largest lenders in terms of outstanding credit, deceleration in their credit growth pulls down the overall credit expansion of all SCBs taken together. The credit growth of the foreign banks registered an even sharper deceleration. Private sector banks, which registered strong credit growth in the comparable period last year, continued to witness a robust credit growth (Table IV.3).
IV.14 The deceleration in the credit growth reflected the slack investment demand, slowing economic activity and more importantly, deteriorating credit quality, especially in the case of PSBs. The ratio of gross non-performing assets (NPAs) to gross advances and the net NPA to net advances that had increased significantly during 2011-12, rose further in Q1 of 2012-13 across the bank groups (Table IV.4). The increases in these ratios were maximum for the PSBs, which account for the major part of the bank advances. The slippage ratio that indicates the fresh NPAs increased across the sectors signalling additional stress in the banking sector. Restructuring of standard assets also increased significantly for PSBs during Q1 of 2012-13. Deterioration in the assets