The Hindu Business Line : Banks' g-sec holdings hit 20-year low

At the end of 2003-04, outstanding investments by scheduled commercial banks in g-secs and other approved securities, at Rs 6,77,588 crore, formed over 84 per cent of the corresponding sum of Rs 8,04,824 crore deployed as non-food credit. Two years on, this ratio has dropped to about 50 per cent.

As on April 14, this year, the outstanding non-food credit amount, at Rs 14,59,338 crore, was almost twice the Rs 7,54,432 crore that banks had put in government paper.

To get a historical perspective, the current ratio of investments to non-food credit (51.70 per cent as on April 14) is the lowest since 1976-77. On the other hand, the 2003-04 end figure of 84.19 per cent was surpassed just once: in 1993-94, when it hit a record 86.33 per cent. This dramatic shift in the portfolio of banks — away from g-secs to lending — is also reflected in their outstanding credit-deposit ratio (CDR), which is now 70.62 per cent. Again, the last time it crossed 70 per cent was 20 years ago!

Through the nineties and right up to 2003-04, there was a declining CDR trend alongside rising investment in gilts relative to non-food credit by banks.

The contributing factors included tighter capital adequacy and asset classification norms, falling interest rates (bringing windfall gains to banks on their g-sec holdings) and low credit demand in an overall recessionary environment.

So marked is the turnaround since then that between 2003-04 and 2005-06, incremental bank credit (Rs 6,55,689 crore) has not just been 13 times the Rs 49,989 crore rise in g-sec investments, but even exceeded the growth in deposits (Rs 5,83,254 crore). Never before perhaps in recorded Indian banking history has such a spectacular shuffling happened.