ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Banking: Missing Dynamism

Even as banks have come to possess a growing share of the community's financial resources, it is the absence of dynamism shown by them in expanding their credit base regionally, functionally and by the size of borrowers that continues to hurt the process of domestic investment and growth. It is necessary for them in a competitive environment to introduce more dynamic instruments of lending and enhance organisational capabilities to shoulder more nuanced lending practices, both of which are missing in the current banking scenario.

Stable Interest Rates Profile

With all-round downward movement of rates of all types and maturities in the past three years, near-stability in the interest rates profile has been achieved. RBI policies of low Bank rate, active management of liquidity and signalling its preference for softening of interest rates have contributed to this development.

Clueless on Economic Slowdown

The shortfall in the government's tax receipts, the rise in its consumption expenditure, the bulging of the revenue and fiscal deficits and the abundance of liquidity with the banking system - all these reflect the persistent sluggishness in investment and growth as well as the absence of policy initiatives to revive the economy.

Structural Deterioration of Banking Development

The Reserve Bank seems to be stuck between the two stools of reform and facing structural disabilities. It is being forced to accept the trend towards 'universal banking', despite its expressed misgivings. Worse, serious structural deterioration has occurred in the pattern of banking development.

Imparting Dynamism to Credit Delivery

When the economy is in dire straits the Reserve Bank cannot sit back and say it has done enough by reducing interest rates and supplying liquidity to the market. It needs to operate on many fronts - interest rate, general refinance, sector-specific refinance, directed credit norms and moral suasion - to introduce dynamism into the banks' credit delivery system.

Realistic Interest Rates Structure

Considering the need for stimulating domestic savings through a strengthened system of banks and other financial institutions, the present structure of bank deposit and lending rates is generally realistic. The average cost of capital cannot be reduced further without hurting the development process.

Financial System in Crisis

The travails of the financial system have a complex origin. Most critically, policy planners, overwhelmed by past ailments, have allowed banks and financial institutions to neglect their basic functions of extending commercial credit, prudential norms and other reform measures notwithstanding.

Low Public Investment Impacts on Capital Market

The persisting low economic growth is having an impact on the financial sector: apart from the recent disquieting developments, the setback to funds mobilisation through public issues which began in the mid 1990s is contributing to a depressing scenario in the capital market and the secondary segment is in a worse state. This has shifted the impetus to the growth of bank deposit with no improvement however in household savings. The severe liquidity strain in the industrial sector has prompted the postponement of investment decisions by entrepreneurs. This is likely to sharply expand the size of non-performing assets of banks and financial institutions .

Disturbing Portents

The current recessionary trends which began in the middle of the last year reflect a grim fiscal scenario. The fiscal deficit for 2000-01 has overshot the revised estimates, with shortfalls in tax and nontax revenues. There is thus a significant spillover of government expenditure into the current fiscal year manifesting in four key developments - unusually high ways and means advances from the RBI, more rapid completion of the government's borrowing programmes so far this year, a 60 per cent rise in RBI's net credit to the government and finally, dwindling tax revenues, galloping expenditures and rising fiscal deficit.

Entering a Low Interest Rate Regime

The economy has entered a low interest rate regime with the latest monetary and credit policy statement of the RBI. While a favourable economic policy environment has made this possible, issues concerning the external sources of liquidity and sluggish investment and growth have not received the attention they deserved. If cognisance had been taken of them, the RBI's policy response may have been different.

All-Round Financial Slackening

All major indicators of financial sector activity - commercial bank credit, capital market equity and bond issues, sanctions and disbursements of development finance institutions and foreign capital inflow - confirm an economic slow down in 2000-2001.

Productive Deployment of Excess Liquidity

The reduction in government borrowing, as the government continues its efforts to bring down the fiscal deficit, is sure to result in excess liquidity in the financial system. Optimal use of funds in this situation will rest on the quality of the banking system's credit delivery and recovery mechanisms.


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