MUMBAI: Liquidity in India’s financial market is at the highest in nearly three years but credit is growing at its slowest pace in a decade, as banks remain unwilling to take risk and also indicating a possible dearth of bankable projects.“Deposits have grown while credit has not expanded commensurately," said Madan Sabnavis, the chief economist at CARE Ratings. "The demand for credit is limited, which is indicative of low level of economic activity."The excess cash in the banking system was at Rs 4.04 lakh crore as on January 2, the highest since April 28, 2017, show data from Bloomberg.The reluctance of local banks to lend has led to flow of foreign funds into the market, with global investors chasing yield in a negative rate environment in developed markets. This has also aided non-banking finance companies develop a new avenue to raise money when the local market shut its doors on them.“Source of liquidity is largely emanating from considerable surplus in BoP (balance of payment) account, which was largely driven by large external borrowing,” India Ratings & Research associate director Soumyajit Niyogi said.These are at a time when demand for credit is low.Indian banks in 2019 expanded their loans by 7.1%, the second slowest pace in the previous decade as several pockets of the consumption economy slowed down over past 12 months. Deposits grew 9.09%.India's current account deficit widened to 2.9% of GDP in the July-September quarter, compared with 1.1% in the year-earlier period, mainly due to a large trade deficit. The balance of payment stood at $5.12 billion in the fiscal second quarter and $19.1 billion during the first half of the fiscal year.The pace of growth in currency circulation has slowed to 12% as on December 27 from 20% a year earlier. Forex reserves hit a record high at $455 billion.“Liquidity surplus has increased due to RBI intervention in the forex markets and lower-than-anticipated currency leakage,” ICICI Securities Primary Dealership managing director and chief executive Shailendra Jhingan said.“The latest redemptions of government bonds have aided liquidity in the banking system to surge,” said Jhingan.Government bonds worth Rs 61,000 crore came up for redemption Thursday when investors received the money back with interest, show data from the RBI. Similar maturities are falling due for Rs 74,000 crore on January 16.“The large surplus in liquidity is forcing the RBI to do operation twist which is liquidity neutral rather than outright purchases of government securities,” Jhingan said.Since December 19, the RBI bought Rs 20,000 crore long-duration papers and sold equivalent debt maturating this calendar year.The central bank has already announced Rs 60,000 crore sale of cash management bills.Indian companies have raised a record $30.25 billion in overseas borrowings this year as they exploited abundant overseas liquidity and overcame a tight domestic market that turned risk averse.“Given the risk aversion environment in the credit market, scope for large-scale misallocation of capital appears to be limited. However, orderly movement of prices in the money market could become a concern,” said Niyogi.