Rising interest rates, declining loan recoveries and a sluggish economy have failed to affect the demand for loans as bank credit saw a 16.6-percent rise on a year-on-year basis, according to the Reserve Bank of India.

The outstanding loan portfolio of banks rose from Rs 47,001.09 billion in August 2012 to Rs 54,790.52 billion this year, as per data released by the apex bank on Wednesday. The growth in demand is being attributed to the fact that other forms of borrowings have become dearer.

This comes as a sigh of relief for banks, most of which have been posting negative growth owing to the ailing economy and the tightening of monetary policy by RBI.

“If one is to compare year-on-year demand, there is an increase. Credit demand from small sectors and individuals has been consistent and the demand coming from the priority sector is generally high during this season,” said Arun Tiwari, executive director of Allahabad Bank.

However, Tiwari pointed out, one needs to be prudent while analysing credit demand. “It is important to understand that as far as bank credit is concerned, one should make quarterly comparisons to get a realistic idea,” he said. “Loan portfolios of most banks have shrunk in the first quarter this year (compared to the last quarter of 2012). Credit demand from corporate houses has slowed and in many sectors it has just frozen.

“The situation will continue to remain grim till corporate projects don’t get clearances and the economy is not revived.”

In addition, the issue of non-performing loans needs to be addressed at the earliest, Deepak Narang, executive director of United Bank of India, said. “The finance ministry has taken up the issue of NPAs with utmost seriousness and banks have also undertaken a variety of measures to ensure better recovery of loans. Solving the NPA problem is our priority right now,” he said.

So is there a possibility of reduction in interest rates any time soon? “Looking at the present state of affairs, reducing the interest rates would hurt our financials further. It will only worsen our situation,” Narang said.