The banks have been advised to reduce their lending rates by squeezing their spreads -- the difference between the lending and deposit rates.
According to the Survey, the banking sector needs to "review the spreads suitably, thereby ensuring that credit offtake by the productive sectors is maintained, facilitating the growth momentum of the economy."
Expressing concern over deceleration in credit expansion, the Survey said, "It is necessary that credit expansion is non-inflationary and the productive sectors receive adequate credit at reasonable cost."
The concerns raised by the Survey on banking sector credit assume significance in the backdrop of declining credit-deposit ratio, which dipped from 74 per cent as on March 31, 2007 to 71.8 per cent as on January 4, 2008.
The Survey also warned that any further deceleration in credit provided by banks "would have a detrimental impact on the overall economic growth."
Attributing credit slow down to RBI policies, the Survey said, "RBI's policy initiatives have reduced credit growth sharply during the current year, with SCB's (scheduled commercial banks) credit growing by only 21.5 per cent till January 4, 2008, compared to 30.8 per cent on January 5, 2007".
It added that the non-food credit (lending to commercial sector) by the SCBs was well below the indicative target of 24-25 per cent for 2007-08.
The Survey also said that as the Indian economy has entered into a higher growth trajectory, the investment demand was expected to remain strong in the short to medium term.
During the current year, it said, there was a spurt in investments under statutory liquidity ratio norms on account of higher deposit mobilisation by the banking sector. In fact, the SLR investments at Rs 1.65 lakh crore (as on January 4, 2008) exceed the statutory minimum limit of 25 per cent.
Referring to bank credit to the sensitive sectors during 2006-07, the Survey said the real estate sector accounted for a very high share of 91.9 per cent of the total lending to the sector which included capital market and commodities in addition to real estate.
It further said that credit to real estate by SCBs expanded by 41.5 per cent at the end of March 2007, compared to 78.7 per cent a year ago.
The outstanding credit to the capital market, it added, increased by 37.4 per cent at the end of March 2007, as compared to 40.6 per cent a year ago.