Economic Survey 2002-2003 on Banking Industry
The Economic Survey has warned banks against increasing their investments in low yielding government securities. It also expressed concern about the weak signs of an increase in the credit flow to the commercial sector despite the downward movement in interest rates and ample liquidity.
It observed that scheduled commercial banks’ (SCBs) investments in government and other approved securities stands at Rs 85,738 crore during the current financial year (up to January 10, 2003), which is much higher than the previous financial year’s amount of Rs 63,082 crore. Investments by SCBs in gilts now constitutes 37.8 per cent of their net demand and time liabilities (NDTL) as compared to the statutory stipulation of 25 per cent. The investment-deposit ratio increased from 39.7 per cent as on March 22, 2002 to 41.5 per cent as on January 10, 2003.
The primary reason for the concern is the fact that any adverse movement in the interest rates scenario can take the bottom out of the bank balance sheets. Roughly a one percentage point higher movement in interest rate erodes the value of banks’ gilt portfolio for every one year maturity by one per cent.
The Economic Survey observed that banks have cut their deposits rates more sharply than their lending rates. This is despite the fact that banks have started lending at below their prime lending rates (PLR). The sub-PLR lending of the banking system constitutes over one-third of banks’ total lendings. The survey has called upon banks to move to an all-cost concept and reduce the spread over the PLR.
The RBI reduced the bank rate by 25 basis points to 6.25 per cent in October 2002. With this, the bank rate has been reduced by 475 basis points over the last five years. At its present level, the bank rate is the lowest since 1973. The PLR of five major commercial banks declined from 11.00-12.00 per cent at the beginning of the year to 10.75-11.50 per cent at the end of the year.
The large interest spread — the difference between interest charged to borrowers and interest paid to depositors — maintained by the commercial banks over their PLR is a constraint for credit pick up. With the interest income higher than interest expenditure, interest spread increased by 6.8 percentage points in 2001-02.
The survey said that the commercial banks have been maintaining large spread around their PLRs. The reason for such spread was the default premium on account of NPAs. With the enactment of the Securitisation Act, an enabling environment has been created for banks to reduce lending rates, the survey said.
While all bank groups met the overall priority sector lending targets, there were shortfalls under sub-targets set for agricultural advances. Another cause for concern is the reduction in the share of advances to SSI sector in the case of both public and private sector banks. In the current financial year (up to November 2002) advances to the priority sector as a whole registered a lower growth of 4.1 per cent as against 5.3 per cent in the corresponding period in the pervious year.