Bank credit growth is expected to be subdued this financial year with the fourth quarter unlikely to show any substantial revival in lending activities amid muted demand.

Bankers say in normal circumstances, the third quarter should have seen a pick-up in the demand for credit but the demonetization has kept the demand very low.

The bank credit growth has declined to 5.8% for the fortnight ended December 9, lower than the 6.6% reported in the previous quarter. In absolute terms, credit offtake increased by Rs 0.47 lakh crore (trillion) to Rs 73.4 lakh crore.

Religare said in a research report, “We believe old notes may also have been deposited in current accounts, in turn, putting pressure on the loan growth.”

A senior banker at a public sector bank said, “Credit growth has been stagnant and may continue to remain subdued during the financial year as the demonetization exercise was taking up much of the efforts of the bank. Across the system, this was the situation with no options to grow the credit.”

As per the sectoral deployment of bank credit, non-food credit growth as of October 2016 declined to 6.7% while credit to large industries (around 32% share in non-food credit) dipped 1.2% over the previous year.

A slowdown in credit was observed across sub-sectors such as food processing, which degrew -9.4% versus a 0.3% growth in the preceding year in October 2015; engineering decelerated by 2.6% as against a growth of 4.1% in the previous year; chemicals & chemical products decelerated by 1.1% as against as a growth of 3.3% in the previous year.

Infrastructure loans declined by 6.6% over the previous year while telecom/power sector loans dropped to 9.3%, lower than the 10.6% reported in the same period in the preceding year.

According to Religare, “We do not see any material improvement in credit growth and expect it to stay under pressure for 2016-17. Mid-tier PSU (public sector undertaking) banks are likely to grow below the system due to asset quality stress. This should lead to market share gains for private banks, especially mid-tier names such as YES and IndusInd Bank, which we expect will grow much higher than the industry.”

However, the deposit growth for the fortnight ended December 9 remained steady at 15.9%, driven by the huge deposits from the public as the demonetization drive continued forcing people to deposit all the money they had with them.

As per the Reserve Bank of India (RBI), banks have received deposits worth Rs 12.4 lakh crore during the demonetization drive up to 10 December. The incremental deposit addition of Rs 0.74 lakh crore was lower due to withdrawals.

According to the data put out by RBI, banks have distributed new currency worth Rs 5.9 lakh crore between 10 November and 19 December 2016.

A senior banker with a private bank said, “With no credit growth options, banks had but to grow their investment book so that the deposits could be put to productive use. Most of the investment went into government bonds and also in the commercial papers that companies raised.”

According to RBI data, the investments growth remained stable at 20% over the previous year and the investments into the government bonds stood at 28.7%; this is specifically investment under the statutory liquidity ratio.