Fis Should Brace For Core Funding

The all-India financial institutions have not done well in terms of sanctions in 1996-97. Sanctions fell by 9.7 per cent to Rs 589.4 billion while disbursements rose by 12.8 per cent to Rs 433.7 billion.

The all-India development banks like IDBI, ICICI, IFCI, SIDBI, IRBI and SCICI ( subsequently merged with ICICI effective April 1, 1996) posted a dismal performance with a fall of 16.1 per cent in sanctions.

This development reflects broadly overall sluggishness that gripped the financial markets in 1996-97.

The much touted excess liquidity has not stimulated demand for finance. In fact the financial institutions (FIs) loan disbursals have fallen recently despite a cut in prime lending rate.

The six financial institutions i.e. IDBI, IFCI, ICICI, SIDBI, IRBI and SCICI accounted for nearly 73.2 per cent of the all financial institutions sanctions and 71.6 per cent of the all financial institutions disbursement for the year 1996-97. It was as low as 68.7 per cent of sanctions and 64.8 per cent of disbursement in 1993-94.

IDBI and IFCI together accounted for nearly 53 per cent of the total sanctions and 50.5 per cent of the disbursement of these six financial institutions. Investment institutions (UTI, LIC and GIC) sanctions account for 12.7 per cent of total sanctions and 15.9 per cent of total disbursements of all financial institutions.

The state level institutions sanctions accounted for 13.5 per cent and 12.0 per cent of disbursements.

The specialised financial institutions i.e. RCTC, TDICI and TFCI has a nominal share of one per cent of the total sanctions and disbursement.

Against this background the financial institutions are trying to enter short term financing and commercial banks are trying to get into project financing. This development, in the opinion of many analysts is expected to impart a healthy competition among the financial institutions and banks.

In that case the financial institutions would definitely like to spread their investment in such a way that the stream of returns from investment in long term infrastructural projects does not get affected.

Cost of funds would make a difference. Benefits from the much talked excess liquidity have been nominal.

As EPW observes, Even so far the generality of lending , the modal lending rates have remained at about 16.5-17 per cent and, compared with the suppressed inflation rate of 4.2 per cent annually, the loan rates work out unusually high.

In the words of an institutional banker, The financial institutions are rather worried that the busy season credit policy may bring them under the ambit of CRRs and SLRs.

If that happens the benefit of an expected reduction in bank rate may not be much as cost of lending may go up as loanable funds fall.

The overall expectation is one of a reduction in bank rate, a fall in lending rates and a stimulus to borrowings to finance productive and infrastructural investment to promote economic growth.