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S. Balakrishnan

AT one time, it was deposits and money supply. Recently, the focus has shifted to credit. The most closely watched indicator in the banking system is now the week-to-week movement in loans to non-bank entities.

Economists and the financial media alike are waking up to the fact that the primary cause for recessionary conditions in industry may be the weak credit situation both on the demand and supply sides.

Take demand. Lending volumes in the financial institutions for new projects are down sharply because the flow of fresh proposals has itself slowed considerably. Fewer projects pass the viability test these days, given excess capacity and import competition in most sectors of industry. The IPO market is practically dead and has been so for quite some time now. (Curiously, the Finance Ministers have been silent on this in their Budgets of the past several years). Even if a project passes the scrutiny of FIs for debt financing, it has little hope of raising the necessary equity.

The supply side is just as bad if not worse. The RBI's norms on capital adequacy, asset classification and provisioning have put the balance sheets of banks under a lot of pressure. The compulsion has been to retreat from lending to comply with the central bank's mandates. For officials of public sector banks, there is also the risk of action by overzealous (or malicious) authorities even for decisions taken in transparently good faith, if a loan goes bad. Besides, credit appraisal, monitoring and administration involve a lot of expertise and hard work, making credit aversion the line of least resistance, especially in the post-VRS situation of many short-staffed banks.

The RBI has not made things any easier. It bombards the banks with barrages of circulars exhorting them to follow the three Cs — be cautious, careful and conservative — on their existing and new exposures. Not exactly a recipe to banks to actively seek credit business.

The worst sufferers of the negative and tight policies of banks are the lesser-rated corporates and small industry and business. They are credit-starved and continue to pay usurious rates of interest. Even the better amongst them are denied the full benefit of falling interest rates. At the same time, top corporates enjoy sub-PLR, in some instances, even sub-market rates of interest: a sort of cross-subsidisation in reverse, with the weak subsidising the strong.

The liberal lending policies of banks and all-India and State-level FIs up to the mid-nineties significantly enhanced the level of economic activity in the country, supported by the Government and public sector spending on infrastructure and industry. True, there is a legacy of non-performing loans. The long-run answer to this surely cannot be a total pullback of credit to all but `AAA' corporate borrowers, Governments and Government — guaranteed obligations. But this is precisely what is happening in the banking system today. With the credit prop to economic activity gone, there is the danger of the recession becoming deeper and permanent. The Government and central bank must worry about this.

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