The Hindu Business Line : Credit crunch not coming from banking system

The outstanding credit-deposit ratio (CDR) of scheduled commercial banks has hit an all-time-high of 75.16 per cent as on October 10, breaking the previous record of 74.99 per cent way back in 1976-77!

The CDR represents the proportion of banks’ deposits that are lent out. A high CDR indicates buoyant credit demand from industry or aggressive loan-pushing by banks, or both. A low CDR reflects lacklustre business activity translating into poor credit demand or risk-aversion among banks, or both.

The CDR plunged to an all-time low of 51.66 per cent in 1998-99 and hovered well below the 60 per cent levels right through 2003-04. Since then, a booming economy – leading to a spurt in lending – has coincided with a steadily rising CDR, touching 73.88 per cent at the end of 2007-08.

Gilt exposure plummets

The other side of a rising CDR has been a reduction in the investment-deposit ratio (IDR) or the proportion of deposits parked in government securities. The IDR crossed a historic high of 45.04 per cent in 2003-04 – again reflecting the absence of sufficient lending avenues for banks, forcing them to invest in gilts much beyond their statutory liquidity ratio (SLR) requirements.

But with a growing economy spurring credit demand, the banks have incrementally whittled down their investments in gilts. The outstanding IDR fell to 30.40 per cent in 2007-08 and the present ratio of 28.27 per cent happens to be the lowest ever!

That there is little credit crunch emanating from the banking system – a point recently made by the Planning Commission Deputy Chairman, Mr Montek Singh Ahluwalia – is also borne out by the non-food credit growth of 10.4 per cent during the current fiscal till October 10. This is as against 4.98 per cent for the same period of 2007-08.

While deposit growth has slowed down marginally this year, banks still have adequate leeway to lend by way of liquidating their surplus holdings of gilts and cash balances with the Reserve Bank of India.

Banks are now holding Rs 120,870 crore worth of government securities in excess of SLR requirements.

Likewise, their cash deposit ratio of 9.89 per cent – the proportion of deposits held as cash in hand and balances with RBI – is above the mandated 6.50 per cent.

The squeeze

So, what is this liquidity squeeze all about? It has to do with the choking of funds from outside the domestic banking system.

During April-June, corporates could raise only $1.6 billion of external commercial borrowings, against $7 billion in the first quarter of 2007-08. Mobilisations from ADR/GDR issues have also fallen from $2.8 billion in April-September 2007 to $1.1 billion in April-September 2008.

If to these are added the drying up of suppliers/trade credit and all sorts of ‘hot money’ (outflows from foreign institutional investors included) – the net effect is that of a liquidity crunch.

But it is more a dollar than a rupee crunch, in which the banks are the least to be blamed.