Plenty of money

After months of tepid growth, non-food credit disbursements by banks picked up during the second half of FY 2004, and the last couple of months have seen unprecedented growth.

Much of the growth continues to be in retail lending, where there remains vast untapped potential. But recent months have also seen an improvement in industrial production and spending on infrastructure, and this is reflected in higher credit offtake.

Going forward, will the rise in credit put pressure on interest rates? There are contradictory pressures in opposite directions.

On the one hand, not a week goes by without some company or the other announcing a new expansion programme. Corporate investment demand has been conspicuous by its absence in the last few years, and there's no question that when it picks up, as it is expected to do within the next six months, there will be additional need for bank credit.

Next, the demand for food credit has remained muted so far, largely because food stocks have come down. But with a bountiful rabi harvest, the problem of plenty with regard to food stocks may arise once again, and these stocks will need to be financed by banks.

On the other hand, now that the norms for external commercial borrowings have been eased, corporates are losing no time in tapping the overseas market for funds.

To the extent that funding takes place from overseas, the pressure on domestic bank credit will diminish. Also, many companies have lined up equity issues, which could also lead to less dependence on bank funding.

But the most important factor, the critical element that ensures that banks remain flush with funds despite an improving economy and despite a sharp pick up in credit, is the continuous rise in domestic liquidity as a consequence of the inflow of foreign funds.

Foreign funds continue to pour into the country and the Reserve Bank of India (RBI) continues to mop up dollars in an attempt to prevent the rupee from appreciating too sharply. The consequence is a flood of rupees.

To illustrate, till February 27 this year (the latest date for which RBI data is available), reserve money growth in FY 2004 was 9.8 per cent, compared to 5.6 per cent during the same period of last year. And this rise in reserve money was caused solely by the rise in net foreign exchange assets of the RBI.

These assets have risen by Rs 1,32,189 crore this fiscal, compared to Rs 83,400 crore over the same period of FY 2003. It is this flood of money that has found its way into banks, swelling their deposits and practically forcing them to park their surpluses in repos.

As on Wednesday, this torrent of liquidity had led to banks keeping not only Rs 50,765 crore with the RBI in the daily repo, but also another Rs 7,250 crore in the 14-day repo. Clearly, there is more than adequate liquidity with banks, despite the surge in credit.

Looking to the future, given the attractions of the Indian economy to foreign investors, the flood of money from ECBs that will come back to the country, and the fact that the US Federal Reserve is unlikely to raise interest rates in any significant manner in the near future, the inflows should continue, interest rates should remain steady, and banks should have no trouble financing growth.