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Disturbing changes in banks' asset portfolios

P.R.Brahmananda

DEPOSITS as a ratio of GNP at current prices formed about 13 per cent in 1970-71. By 1980-81, this proportion had risen to 26.4 per cent, at a growth rate of about 7.34 per cent per annum. By 1990-91, the proportion increased further to 34.3 per cent, the growth rate slowing down to 3.27 per cent per annum. By 2000- 2001, the deposits to GNP ratio had moved up to 47.2 per cent, close to 50 per cent of GDP. The rate of growth of the deposits to GNP ratio had further slowed down to 2.41 per cent per annum.

The ratio of bank credit to the commercial sector, as a ratio of GNP at current prices, was about 10.3 per cent in 1970- 71, against the deposit to GNP ratio of 13 per cent. By 1980-81, the credit to GNP ratio had gone up to 17.6 per cent — a rate of growth of 5.91 per cent per annum. In 1980-81, the deposit to GNP ratio was 26.4 per cent. Clearly, deposits were rising at a faster rate than credit to the commercial sector.

This was also a leading objective of bank nationalisation. By 1990-91, the credit to GNP ratio had gone up only to 20.7 per cent, the rate of growth having been reduced to 1.72 per cent per annum. The deposit to GNP ratio was 34.3 per cent. Once again, the bank nationalisation objective of reducing the proportion of bank credit to GNP was being maintained.

By 2000-2001, the ratio of bank credit to GNP had, however, moved up to 25.1 per cent, whereas the deposit ratio had moved up to about 47 per cent. The bank credit ratio rose at 1.6 per cent per annum during the 1990s. Though one of the normative objectives of the reforms was to increase the rate at which credit was expanding in relation to the rate at which deposits were expanding, this goal was not getting fulfilled.

The reason was not because of any statutory restrictions on the growth of the credit to GNP ratio but because banks were finding it more profitable and less risky to invest more and more in government securities rather than in loans to the industrial and commercial sector.

Currently, about 25 per cent of GNP is generated by bank credit to producing and trading units, though the banks are able to commandeer nearly 47 per cent of GNP as deposits. In 1970-71, the ratio of bank investment in government securities was 3 per cent of GNP at current prices, whereas bank credit was 10.3 per cent of GNP. In 1980-81, bank investment in government securities formed 6.02 per cent of GNP at current prices, whereas bank credit formed 17.6 per cent of GNP.

In 1990-91, this ratio had risen to 8.9 per cent, whereas bank credit formed 20.7 per cent of GNP. But look at what happened during the 1990s. Banks' investments in government securities formed 16.7 per cent of GNP at current prices in 2000- 2001, whereas bank credit formed only 25 per cent of GNP in that year.

Economic theory asserts that with the process of development, the ratio of bank deposits to national income should go up in a developing economy. It also states that as the ratio of deposits to income goes on rising, the ratio of bank credit to the productive or the commercial sector including industry, agriculture, trade and other services should also rise.

The bank should become the chief custodian of the public's liquid assets. At the same time, the banks should be the chief lenders to the productive sector. What is happening in India is that whereas the banks are becoming the chief custodians of the public's liquid assets, the bank portfolios consist more and more of government securities, and this is the tragedy of the story.

The banks are becoming the chief sustainers of the government's fiscal and, more particularly, revenue deficits. What this means is that government is resorting to banks to pay more and more of its establishment and current expenses. Is this the proper role of the banks in a developing economy? When Indira Gandhi nationalised the commercial banks, she wanted the latter to invest more and more in government securities so that government itself, through the public sector agencies, could invest more and more in expansion of productive assets on behalf of the community.

This approach was rejected because the productive assets of the public sector were not breaking even generally. But they were able to earn some returns through production operations. But, today we are making the banks lend more and more to the non- productive operations of the government. And let us note this. As the government can borrow from the banks, abundantly and at cheap rates, why should the government be interested in the promotion of savings, especially for use in productive asset expansion?

The picture becomes clearer if we express the banks' investments in government securities and banks' lending to the commercial sector as ratios of deposits. In 1970-71, the credit- deposit ratio was 79.3 per cent. It fell to 66.8 per cent by 1980-81, and dropped further to 60.4 per cent by 1990-91. After the reforms, it plummeted in 2000-2001 to 53.1 per cent. Look at the ratio of investment in government securities to deposits. In 1970-71, this ratio was 23.1 per cent. By 1980-81, it had gone up to 24.3 per cent and by 1990-91, it had risen to 26 per cent. But, by 2000-2001, it had jumped to 35.3 per cent (see Graph).

Theoretically, it is wrong to consider banks' purchases of government securities as `investments'. From the economy's angle, if banks lend year by year to governments for paying their salaries and meeting their current expenditure, this would not be considered investment. In the earlier days, investments of banks in government securities were corresponded by capital expenditure by the government, often in the form of medium-term and long-term loans to development banks. The government now performs no such function! And year by year, after the reforms, more and more bank loans are being used to meet current needs of government. We have subverted every known principle of what banks are expected to do.

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