A Game Of Farce
Milkha Singh's refusal to accept the Arjuna Award has sparked off a heated debate over the country's highest sporting honour. This year's controversial list is being seen as the straw that broke the camel's back. Leading sports people believe the award has been devalued and compromised by political lobbying.

A Leader Reformed
A.K. Antony, a one-time Nehruvian socialist, is winning the support of industry as well as Central funds in his new avatar as the harbinger of reforms in the economically beleaguered state.

Family Bride
Poor sex ratio has forced the Gurjjars of Rajasthan to share their wives.

ECONOMY: BANK CREDIT

Stash The Cash

Banks are sitting on deposits of over Rs 10,000 billion, but credit disbursement is sticky

By Sumit Mitra

Chairman and Managing Director of the Oriental Bank of Commerce B.D. Narang is a seasoned banker adept at reading the tea leaves of business cycles. He was recently enthralled by a request from a dealer in automobile parts for enhancement of the firm's working capital loan. Such requests are not frequent nowadays. Could it therefore be a glimmer of hope amidst the three-year-long gloom in the market for investment credit? Did it imply a sudden acceleration in the assembly lines of car plants? Narang quickly tapped his network of industry friends to find out if the borrower's order book was suddenly overflowing, but was disappointed when he was told the reason for the request. The customer wanted more working capital because the automobile manufacturer to whom he supplied the parts had increased the bill clearance period from 120 days to 240 days. Rather than discount the bill for a longer period, he had wanted to raise the loan limit and thus save on cost.

Banks in India are flush with deposits, but fresh demand for credit to start new projects or to add to existing capacities is virtually non-existent. In the fortnight ending July 27, the aggregate deposits with the scheduled commercial banks (including the regional rural banks) grew by Rs 5,917 crore, but their outstanding credit inched up by Rs 1,137 crore. The credit is divided under many heads, not all of which have a bearing on new investments. Food credit, for example, pertains to funding of the public-sector Food Corporation of India to procure grain from farmers for subsidised sale through ration shops. The remaining non-food credit too is an inaccurate barometer for loans disbursed for investment as a substantial, and rising, part of it goes into "retail banking", like financing housing and car loans. Banks in India take years to publish the figures of disbursement under individual heads.

However, the fortnightly growth of all categories of non-food credit of the scheduled commercial banks till July 27 was as low as Rs 889 crore. It was only 15.02 per cent of the deposits the banks had collected in the same time. Banking circles assume that the share of incremental investment credit, meant for greenfield projects or capacity expansion, is no more than 2-3 per cent of the incremental deposits. This figure, it is estimated, was 6-7 per cent till three years ago.

"Companies are seeking new bank loans to retire old and costly loans." B.D.NARANG, CMD, Oriental Bank of Commerce

Where have the good old days gone-when project loans were arranged over a cup of coffee at a brief meeting between the banker and the borrower-gone? Or after a phone call from some political heavyweight? It is nobody's claim that banks have been rid of sweetheart deals. But an increasingly strict watch on asset quality (in banking parlance, loan is asset and deposit is liability) has put a squeeze on credit. Besides, the overall slowdown of the economy has greatly depressed the number and size of credit requests.

According to D.C. Saxena, manager (loans), State Bank of India, Jaipur, there was not a single applicant from the region in this financial year asked for a loan of more than Rs 5 crore. In the previous fiscal, there was only one loan of that magnitude, and that too was given to a hospital project, which is categorised as service. In three banking regions-east, north-east and central-the credit-deposit ratio has dropped to 38, 28 and 34 per cent respectively, much below the all-India ratio of 51.3 per cent. It lends credence to the left parties' shrill outcry against regional discrimination in disbursement of bank credit. But bankers say it is because these regions are absolutely dead investment-wise. In the other regions you can still feel the pulse, however faint. Narang says, "There are a few new refineries in the west, an upcoming power project in Rajasthan, and many rural infrastructure projects in Punjab. But where is new investment in Uttar Pradesh, West Bengal, Bihar or Assam?"

"If growth of investment credit is an indicator, a recession is round the corner." S.S.KOHLI, CMD, Punjab National Bank and IBA chief

The negative effect of the economic slowdown on credit offtake has been multiplied by the new banking norms which set the alarm bells ringing if 10 per cent of the value of a loan's security is eroded in the first year, or if the borrower defaults for two quarters. Earlier, banks waited for full erosion of the security to put a red mark on the loan. The Basle Accord, to which India is a signatory, will compel the Indian banks from October to provide for any default which has lasted just one quarter.

These stringent norms have put loan officers under a rigorous obligation not only to overlook extraneous recommendations but to look beyond the existing repayment capacity of a borrower into his future potential to service a debt. Which is why loan officers no longer sanction credit merely on the strength of collaterals but scan the prospective borrower's cash flow statements with a fine comb and carry out "sensitivity tests," a new jargon that checks on his ability to absorb shocks in the business environment. And once a bank goes sick, or approaches sickness, it is forced to restrict its operations to "narrow banking", which permits the bank only to invest in government securities. When Santosh Singh Parihar, a model customer of Dena Bank in Bhopal, saw his housing loan for Rs 2 lakh turned down, it was presumably not for his past repayment record, which is spotless, but for the bank being under watch.

With the falling numbers of industrial customers, banks are putting their deposits in government securities, or gilts, far in excess of the statutory requirement of 25 per cent of the deposits. This investment (see chart) is touching 40 per cent even though the average yield on a 10-year gilt has fallen from 11.6 per cent to 9.21 per cent in the past year, and is projected to drop further. S.S. Kohli, chief of Punjab National Bank and chairman of the Indian Banks Association, says, "The thrust of banking in India is naturally shifting to housing and car loans."

Banks are distinguished from other financial institutions by their role in the money supply through the creation of deposits that are free to be lent. When a large chunk of the deposits goes to funding government expenditure or to meet citizens' personal loan requirements, it can at best guarantee a safe, though modest, income to the banker. The pity is, it locks away the fuel of its customers' future economic growth.

—With Rohit Parihar and Neeraj Mishra

MetroScape

Looking Glass

Delhi Restaurant:
Singh Sahib

Chennai Exhibitions: Apparao Galleries

Bangalore Space Ride: Thrillarium

Delhi Maps: Dastkari Haat Samiti

Delhi Play: Neil Simon

Delhi Textiles: Out of the Cocoon