The Reserve Bank of India is considering a proposal to include non-statutory liquidity ratio securities in the investment portfolio for setting the priority sector targets of commercial banks.
The move is prompted by the fact a lot of corporate credit, which traditionally was disbursed under the head of bank credit, is now being advanced through bonds, debentures and commercial paper. The result is that bank credit is lower than it actually should be.
Since priority sector credit is calculated at 40 per cent of the net bank credit, any loss of bank credit in favour of investments means that the flow of funds to the priority sector will drop.
Therefore, to ensure that the priority sector does not lose out of funds flow, RBI is considering to include non-SLR investments for calculating priority sector credit.
For instance, while non-food bank credit in the first quarter of 1997-98 declines by Rs 4,064 crore, banks investments in commercial papers, bonds, debentures and shares of public sector and private companies and bills rediscounted have show a large increase of Rs 2,682 crore.
During the corresponding period of the previous year there was a modest increase in investment by Rs 870 crore.
Hence the total flow of funds from banks to the commercial sector show a decline of Rs 1,382 crore in the first quarter of 1997-98 as compared with a large decline of Rs 6,350 crore in the first quarter 1996-97.
The diversion of credit to non-SLR investments means that flow to the priority sector is adversely affected.
RBI sources point out that in future there will be preference on the part of banks to pick up bonds, debentures and commercial papers of corporates instead of giving credit.
This is so as the debt papers are tradable unlike bank credit which is more or less a permanent asset in the books. Debt papers, on the contrary, can be sold in case of tight liquidity conditions.
Given the forecast that more credit will be advanced through the investment route, it is felt that priority sector advances should not suffer. Hence the proposal to take non-SLR investments for calculating priority sector loans.
