Indian banks face the likelihood of scaling down their lending targets for 2007-08, following a slump in credit off-take during the first six months of the financial year resulting from successive rounds of interest rate hikes.

The loan portfolio of banks has grown by Rs 54,908 crore (Rs 549.08 billion) till September 14, representing only 3.6 per cent growth. During the same period last year, banks had lent Rs 147,657 crore (Rs 1,476.57 billion), a rise of 10.5 per cent.

As a result, banks anticipate credit growth in 2007-08 to be closer to 20 per cent, down from 27.6 per cent in 2006-07 and short of the target of 25 per cent set at the beginning of this fiscal.

Bank credit would need to grow by Rs 4,20,169 crore (Rs 4,201.69 billion) in the second half of this year if banks have to achieve the target of 25 per cent for 2007-08, which is much more than the increase of Rs 416,115 crore (Rs 4,161.15 billion) in the whole of 2006-07. In the second half of 2006-07, bank credit grew by Rs 268,458 crore (Rs 2,684.58 billion).

"Banks which have set higher targets may need to review and revise their targets. Credit growth of around 20 per cent (for the banking sector) is achievable. Growth of 24-25 per cent may not be possible," said the chairman and managing director of a large public sector bank.

"Ultimately, the growth in credit may be 20 per cent. This year will not be as good as last year," said the chairman and managing director of another public sector bank, and also an office-bearer of the Indian Banks' Association, on conditions of anonymity.

The target of 25 per cent increase in advances for 2007-08 was in line with the Reserve Bank of India's projections.

The central bank had placed the credit growth, excluding food credit, at 24-25 per cent during 2007-08, a deceleration from a compounded 29.8 per cent growth over the preceding three years.

The numbers for the first half of the year suggest the projections were over-ambitious. The RBI is most likely to revise its credit growth target when it undertakes the second quarterly review of its policy for 2007-08 on October 30.

The demand for bank credit normally gains momentum with the start of the festive season. For example, the second fortnight of September 2006, which marked the beginning of the last festive season, had seen a sharp increase of over Rs 47,000 crore (Rs 470 billion) in outstanding credit.

But this year, such a spike may not happen, thanks to the high interest rates. State Bank of India [Get Quote], the country's largest bank, failed to draw any significant response in its Maharashtra circle to its special offer of a 50 basis point reduction in lending rates on all retail loans and also easing of terms like 50 per cent less processing fee and higher loan-to-value ratio for purchase of homes.

According to estimates, Maharashtra accounts for about 20-25 per cent of all retail loans.

A Mumbai-based senior banker said the loss in business in the first half of this year would be difficult to compensate in the next six months, as any increase in credit during the "busy season" would not be enough to meet targets set for this year.