The Hindu Business Line : `Strong pick-up in non-food credit to continue'

The document has also hinted that there is further scope for reduction of lending rates of banks. The widening interest spreads "establishes that banks have not fully passed on the benefit of falling interest rates to their customers."

New Delhi , Feb. 25

GOOD days appear to be ahead for the banking sector with the Economic Survey predicting that the strong pick-up in non-food credit would continue in the near future.

"With the growth of manufacturing recording an increase of 9 per cent in April to December 2004, the highest after 1995-96, the higher growth of non-food credit is likely to continue," the Survey has said.

The rising trend in the ratio of non-food credit to aggregate deposits of the banks also suggests continued buoyancy in credit pick-up.

"The rising trend in the ratio of non-food credit to aggregate deposits of the scheduled commercial banks suggests a further likely increase in the demand for bank credit in the coming months," the Survey says.

The document also hinted that there was further scope for reduction of lending rates of banks. It has said that the widening interest spreads "establishes that banks have not fully passed on the benefit of falling interest rates to their customers."

It has said that despite the RBI's efforts, lending rates of banks have exhibited considerable downward rigidity.

"The RBI has been making consistent efforts to make lending rates of banks more transparent and to align them with deposit rates. The introduction of benchmark prime lending rates (BPLR) has, to an extent, addressed the problem of downward rigidity of lending rates.

The widening spreads suggests that further efforts are needed to tackle the problem of downward rigidity of lending rates," the Survey says.

On the term-lending front, the Survey has pointed out that with the era of development financial institutions (DFIs) coming to a close, the banking sector needs to step up its efforts to meet the term financing requirement of industry.

"The declining role of DFIs poses a challenge to banks in meeting the long-term requirement for funds. Banks need to hone up their skills in project financing," the Survey said.

It said that the Government's adherence to the targets set under the Fiscal Responsibility and Budget Management Act (FRBM Act) would release funds for long-term finance.

"Adherence to the FRBM Act stipulations is likely to reduce the exposure of commercial banks to the Government paper and enable banks to undertake more long-term financing to the commercial sector," according to the Survey.

On agricultural lending, it said that banks need to expand the basket of crops for which credit is extended.

"Further efforts are required to sustain improvements in the credit flow to agriculture. In this context, there is a need for banks to focus their efforts on commercial crops. besides cereals."

It has also urged the banks to align the lending rates to the small and medium sector with the rates offered to large industries.

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