Banks at threshold of new growth era
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Banks will be keen on a more profitable redeployment of available resources, as there may be a significant depreciation in the value of investments in government and approved securities.
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THE DEVELOPMENTS in the money market since the beginning of this year should have come as a surprise to managements of even bigger banks as well as the monetary authorities. Against the observations, at this time a year ago, that scheduled commercial banks were having excess liquidity and should make a serious bid to expand credit in all sectors, particularly those in the agriculture, their credit deposit ratio by November 12 this year had zoomed to 62.35 per cent from 54.76 per cent a year ago. On the other hand, the investment deposit ratio had dropped to 43.31 per cent from 46.07 per cent.
High prices for crude and petroleum products as also for metals in world markets should have been responsible for only a portion of the smart rise in incremental advances. There was no pressure on the banking system even in the third week of March this year even with reports of keener demand for funds from industry and trade.
The happenings in the current financial year, especially after September, have led to incremental credit spurting to Rs. 1,54,732 crores by November 12 as compared to Rs. 33,342 crores in the same period last year. With incremental deposits rising in a less pronounced manner by Rs. 92,201 crores against Rs. 1,11,743 crores, fresh investments were sharply lower at Rs. 13,981 crores against Rs. 94,079 crores. Obviously banks have had to utilise surplus resources of earlier years, funds released from non-performing assets and reduced holdings of non-SLR securities.
As P. Chidambaram, Union Finance Minister, has been exhorting banks to expand credit to the agricultural sector and carry out their operations on a targeted basis, the stringency in the money market may get heightened in the coming months. This is also due to the absence of a new uptrend in deposits. But with faster inflow of forex reserves and contraction in advances to the oil refining companies, due to declining world prices for crude and petro products as well as base metals, there may be an increase in lendable resources.
Banks will also be keen on a more profitable redeployment of available resources, as there may be a significant depreciation in the value of investments in government and approved securities.
The decline in gilt-edged prices can be moderated, with staggered borrowing by the Centre and also the buy back of dated securities issued under the Market Stabilisation Scheme. There should also be a reduction in the cash reserve ratio by even one percentage point in four stages if short-term rates tended to rise awkwardly.
Build-up of stringency
When the Credit Policy for 2004-05 was announced in April this year, it was considered necessary to intensify the operations of the MSS and also immobilise additional portions of deposits by raising the CRR by a half percentage point. Since it is anticipated that credit to all worthy borrowers will have to be expanded in a big way, it is being discussed in money market circles how a portion of the bulging forex reserves can be utilised as suggested by the Vice Chairman of the Planning Commission to fund infrastructure projects. With the use of even owned foreign exchange assets on account of the surplus in the current account being sizable at $13.64 billion in three years, there will be a problem of securing matching rupee resources, which can be overcome only if there is unusual buoyancy in the primary market.
The heady inflow of FII funds so far this year to the extent of $7 billion should also prove to be a helpful factor in increasing money supply.
There should not be any attempt to moderate the growth in money supply for combating inflationary pressures, as it should be borne in mind that the sharp rise in the inflation rate since February this year is mainly due to high prices in world markets for some products.
With crude prices coming down and hopes of further drop to less abnormal levels in the coming months, the Finance Ministry as well as the Reserve Bank will be in a position to bring down the inflation rate to below 6.5 per cent, as indicated by the monetary authorities.
While credit expansion in the current busy season may be helped by an increase in rupee resources because of bulging forex reserves, the Centre's borrowing programme can be successful only if the coupon rates on new loans are higher than in recent months.
Government borrowing
In the changed situation, there will necessarily have to be issue of short and short-medium dated securities, if the coupon rates have to be raised only modestly.
The net borrowing of the Centre amounted to only Rs.33,684 crores up to November 19, while dated securities had been issued to the extent of Rs.25,000 crores under the MSS. As the target for net borrowing is Rs.90,365 crores in 2004-05, an amount of Rs.56,681 crores will have to be secured afresh by the Finance Ministry. While incremental deposits of SCBs up to October 1 were only Rs.95,598 crores, the operations of the MSS also will have to be carried out in such a manner as to lead to a return flow of funds to the money market. It remains to be seen how the authorities concerned overcome the problems arising out of the developments in the money market.
The new policies of the Reserve Bank have, therefore, special significance in the present context. But there is no gainsaying the fact that the era of cheaper money has come to an end and banks and financial institutions will have to face new challenges in the coming years. The complexion of banks in the public and private sectors also may undergo a metamorphic change, as the Finance Minister has suggested that banks in the public sector should think of mergers.
Changing structure
The Finance Minister's observation that foreign banks too may be allowed to increase their stake in the equity capital of private banks by 10 per cent every year and even acquire control over management of these institutions in three or four years without any restriction on voting rights has given rise to speculation about how the necessary legislation will be enacted in the forthcoming Budget session with the Leftist Parties being opposed to such moves. It is probable that some compromise solutions will be found and the second-generation reforms of the financial sector will be introduced meaningfully.
In view of the major developments in the money market and the need to increase investment in a big way in many directions, the banking sector will have to grow in stature in a big way.
P. A. Seshan
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