The current year 1997-98 is witnessing a surge in deposits. Till June 6, deposits increased by Rs 13,447 crore as against Rs 3,856 crore in the corresponding period of the previous year. Going by the trend, total deposits may increase by around Rs 90,000 crore in the current year. But credit is not picking up equally sharply.

Food credit expanded by Rs 2,318 crore in the same period (Rs 2,148 crore). Non-food credit contracted by Rs 1,672 crore (Rs 6,253 crore). In the same period, investment in debentures and other financial instruments amount to Rs 2,392 crore (Rs 698 crore). The yield on government securities has been declining since last year by nearly 1.5 per cent but still banks have attraction towards these instruments because of certain reasons.

It is a myth that supply side economics works in credit offtake. You can lead a horse to a pond but you can not make it drink if it is unwilling to do so. Similarly, if the demand is not there, borrowers will avail credit to just pile up inventory as that will depress their profits. On the other hand if demand is there, they may be willing to avail credit even if the interest rates are high. Therefore, demand for goods and services is more important than interest rates or supply or money.

Demand may be slowing down in selected sectors like automobiles, cements etc., but there is still appreciable demand. Therefore the bankers' fear to lend should be the main reason for the slack in credit growth. But the industrialists are facing another problem, namely, matching debt-equity ratio for projects. Since the primary market is yet to pick up, industrialists are finding it difficult to raise equity. High leveraging of projects can destroy their profitability particularly in the initial stages.

Then, triple `A-rated' borrowers are also resorting to availing external commercial borrowings at around 50 to 60 basis points above LIBOR which works out to cheaper than domestic credit even if the cost of hedging is included. Commercial papers also come in handy for them. These are some of the other reasons for the lack of growth in credit.

Today money is available cheap and even call money market is subdued with an interest rate of only three per cent. The biggest beneficiary of this lull in the credit activity of banks is the government which has mobilised a lot of funds through borrowing cheap.

Low inflation rate by Indian standards at around 5.5 per cent also facilitates this kind of situation . The RBI is confident of controlling money supply at 15 per cent level but if it purchases dollars continuously in order to arrest appreciation of the rupee, money supply is bound to increase and open market operations like selling dated securities cannot arrest the trend. Several things are proved by the present peculiar situation:

Slump in capital markets acts as a barrier for availment of credit by industrialists.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.