Will disbursing money through banks help?

Will disbursing money through banks help?
Comment E-mail Print Share
First Published: Mon, Jan 05 2009. 10 22 PM IST

Updated: Mon, Jan 05 2009. 10 22 PM IST
It’s well known that since the government doesn’t have much leeway on the fiscal front, it’s using the public sector banks as vehicles for disbursing the money it doesn’t have.
What exactly does the government’s directive to public sector banks to lend an extra Rs56,000 crore in the next three months, over and above their target, really mean?
First, there’s no clarity about what the target was. But the Reserve Bank of India, or RBI, in its mid-term review of monetary policy, had said the target for non-food credit growth—including investments in corporate paper—should be 20%. If that target still holds, it would imply non-food credit plus corporate investments should be Rs28.95 trillion at the end of March, an increase of around Rs4.82 trillion from the level as on 28 March 2008.
Add the extra Rs56,000 crore the government is now talking about and the targeted outstandings for end-March goes up to Rs29.51 trillion, or an increase of Rs5.39 trillion for the fiscal year.
Does it mean a huge push in credit during the last quarter? Not really.
As on 19 December, according to RBI data, the outstandings on account of non-food credit and corporate investments amounted to Rs26.93 trillion, which means that Rs2.59 trillion is the net extra amount that will have to be lent out between the middle of December and the end of March to meet the target.
Just to put that in perspective, between mid-December 2007 and end-March 2008, the net increase in non-food credit and corporate investments was Rs2.43 trillion, which means this year the target is for around Rs15,000 crore more worth of net disbursements in the three-and-a-half months between the middle of December 2008 and the end of March 2009, compared with the same period last year.
The sum of Rs15,000 crore is not a huge amount. But the problem is that in the three months between mid-September and mid-December 2008, non-food credit plus investments in corporate paper were around Rs2,400 crore lower than what they were in the same period of 2007, thanks to the credit crunch. It’s compared with what happened in the last three months that the target looks big.
This column has been pointing out that during the last downturn in the early part of the decade, bank credit growth had gone down to around 10% year-on-year during the depths of the downturn and that banks preferred to park more and more of their resources in government investments in order to make easy gains from the fall in interest rates. These trends have also started occurring recently.
Nevertheless, latest RBI data shows banks withdrew a whopping Rs20,239 crore from investments during the fortnight to 19 December, although lending during the fortnight was negligible. Perhaps banks have been booking some profits on their treasury holdings.
The problem has been that deposits fell during the fortnight and as a result the credit-deposit ratio was a very high 74.52. Hence the need for the cut in cash reserve ratio, the precentage of deposits banks must park with RBI.
Write to us at marktomarket@livemint.com
Comment E-mail Print Share
First Published: Mon, Jan 05 2009. 10 22 PM IST