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Industry lobbies govt for larger funds for corporate sector

Gurdip Singh in New Delhi

The industry is lobbying with the government to ensure greater quantum of funds for the private sector through lower interest on government securities.

It has spoken of the large investment in government securities as a result of the high yield from such investment. The interface in this regard is taking place at different levels between the government and businesses, including leading chambers.

Industry sources say the trend of excess government borrowings is continuing unabated during the fiscal 1999-2000. During the first fortnight, ended April 16, scheduled commercial banks invested Rs 79.52 billion in government securities against a net investment of Rs 39.18 billion as loans to the productive sector during the period.

Till May 21, banks had invested an additional Rs 152.89 billion in government securities while non-food credit had shrunk by Rs 25.42 billion compared to the fiscal 1988-99 figure.

According to latest statistics released by the Reserve Bank of India, the total credit to the commercial sector fell by Rs 47.58 billion between March 26 and June 4. The decline in the credit flow to the commercial sector is largely due to the dip in the non-food credit which has dropped by 1.7 per cent or Rs 58.91 billion during this period.

In 1998-99, scheduled commercial banks invested Rs 357.87 billion in government securities. Non-food credit increased by Rs 375.94 billion during the year.

In terms of volume, holdings above the statutory liquidity radio amount to Rs 560 billion. In percentage terms, the banking sector now places 33 per cent of total demand and time liabilities in SLR securities against a 25 per cent requirement.

The falling credit to deposit ratio of the scheduled commercial banks is a testimony to the shift of funds away from the corporate sector, industry sources said.

While the banks are busy earmarking higher funds for investment in government securities, they have shown little interest in maintaining the level of non-food credit.

In three consecutive years, at the end of the third week of May, non-food credit has fallen lower than the level obtaining at the end of fiscal year (March). In contrast, investement in government securities has shown a healthy use of around Rs 100 billion during the period.

Industry sources argue that the most important factor for such high investment in government securities is the high yield from such investments. Over the last five years, an investment of Rs 1,000 in government securities would have fetched Rs 742.51 now. The return includes the interest earned on the investment and the appreciation in capital value of the bond.

Return from investment in government securities, gauged by the I-sec Bond Index (I BEX), is a high 15.5 per cent (annualised) over a five-year period. This is much higher than what banks pay to the depositors with fixed deposits at the maximum slab.

The only option, industry sources plead, is to reduce interest rates offered on government securities. This needs to come down by at least four per cent (since investments in government securities attract a mere 2.5 per cent weight in calculating capital adequacy ratio) to make credit to commercial sector an attractive proposition for the banking sector.

That is at the existing prime lending rate level yield on government papers must not be more than eight per cent. If, in addition, to encourage the productive sector and turn the indian economy competitive in the international market, PLR is also brought down to the international level -- from the present 12 per cent to say eight per cent -- interest on government securities should be around four per cent only, they say.

UNI

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