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Saturday, Jan 26, 2002

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Banks eye food credit to boost CD ratio

C. Shivkumar


PUBLIC sector banks are plugging hard for food credit this year in a bid to push up credit deposit (CD) ratio and boost the average yield on assets.

Banking sources said it was not just the public sector banks that were seeking higher allocations of food credit, but private sector banks were also in the fray. Food credit is normally done through quota allocations by State Bank of India. Till last year, there was very little interest from the banks in financing food credit and the CD ratio figures were above 59 per cent mostly on account of non-food credit off-take.

But there has been a steady deterioration in the ratios. CD ratios are currently the lowest in about 35 years. The banking industry average is currently in the region of about 51 per cent. With the peak season credit off-take also not very encouraging, the dependence of the most banks have been exclusively on Government securities and treasury operations for sustaining profitability.

The investment deposit ratio for the banking sector is in the region of about 44 per cent as against the statutory liquidity ratio of 25 per cent. The bulk of these investments are exclusively in Government securities, public sector bonds and minuscule amounts in corporate debentures.

Bankers, however, recognise that this source of profit is not likely to last forever. This is especially because as the prices of gilt-edged securities rise, the spreads also thin out for future investments, which is precisely what is happening. There is also very little scope for bringing down deposit rates. One public sector banker admitted, "Spreads as measured by the weighted average cost of working funds and average yield on assets are thinning out." It is barely two per cent, the lowest in two decades.

Besides, banks' fear that these spreads would also come under further pressure if there is any more escalation in non-performing assets. This now appears inevitable in view of the negative growth rates in demand in most sectors.

Therefore, one of the critical factors that are now influencing the banking sector's renewed interest in food credit is the virtual absence of any credit risks and good returns. Most food credit in the banks' books till date remains classified as standard assets.

Above all, food credit continues to offer returns of one per cent above the SBI's prime lending rate. This essentially implies banks would be earning at least 12 per cent on food credit, which translates into a spread of at least six per cent over the weighted average cost of working funds, the bankers added. Comparative spreads between non-food credit weighted average costs of working funds are barely four per cent, barely one per cent above gilt-edged securities.

As a result, with this sudden interest in food credit, the year-on-year increase in the sector has been phenomenal. The outstanding food credit as on December 28, 2001 was Rs 52,276 crore , which is a year-on-year increase of Rs 14,826 crore.

But this expansion in food credit is coming about despite the Finance Ministry's efforts to reduce food stocks. Bankers said that although the RBI has been suggesting the need to reduce food credit to reduce food stocks, no formal decision has been taken. "Till these guidelines are issued, food credit will continue to be attractive, and we will continue fund it," they added.

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