The Hindu Business Line : Banks have enough to spare for infrastructure projects

The simple fact is capital investment in agriculture and industry is still not driving bank lending. After the south-east Asian currency crisis, no central bank wants to operate on thin reserves as sudden capital outflows can upset growth rhythms.

IN 2005-06, some $ 5.4 billion raised abroad under the India Millennium Deposit (IMD) scheme in 2000 at a fixed interest rate of 8.5 per cent, will come up for redemption and should not pose any problems.

In 2003, the Government had said, "keeping in view the fact that a significant part of these bonds could be transferred in favour of residents or could be reinvested in the form of NRI deposits in the light of past experience in similar bond issues, the actual debt service may turn out to be much lower."

Between 1998 and 2000 the country raised about $10 billion overseas to fund infrastructure development. The rupees created from converting dollars were generally placed in gilt with little, if at all, going into infrastructure.

The IMD was floated after India went nuclear and attracted sanctions from the US. With the clearing of the IMD loan, India will have done with the last of its major overseas loan (one excludes concessional aid). Today, the country is sitting on a pile and should be earning more on dollar deposits parked in foreign government paper with interest rates moving up in the US.

Every time Mr Greenspan marks up interest rates, it is celebration time for the RBI as in the last couple of years the returns were lower than the Government offerings on gilt and the promised 8.5 per cent on IMD.

Going by the current trends, dollar flows may not taper off though the RBI is not quite happy with the quality of FII inflows as it would like to get at their "beneficial ownership", which can be a tough call.

Over the last three years, dollar inflows have kept interest rates in financial markets at levels substantially lower to the prime lending rates (PLRs) of banks.

Most sub-PLR lending by banks have been linked to market rates and in a way helped corporates hang on to cheap funds. In recent months, banks have upped their sub-PLR rates by 200 basis points to between 8 per cent and 8.50 per cent for triple-rated corporates though it does not apply to triple-rated farmers. Well, when were farmers ever rated by banks or rating agencies?

Some bankers are surprised over the debate on using forex reserves for infrastructure as the banking system can easily raise or even have around Rs 30,000 crore rupee funds for power or port projects provided they come up for funding. These projects cost little in terms of dollars as they are not import-intensive and foreign partners do come up with equity. Also the funds are not needed at one go.

The RBI could be holding on to the regime set down by Dr Bimal Jalan, RBI Governor, in 2002. The broad principles that have guided India after the Asian crisis of 1997 are: careful monitoring and management of the exchange rate without a fixed or pre-announced target or a band; flexibility in the exchange rate together with ability to intervene, if and when necessary; a policy to build a higher level of foreign exchange reserves which takes into account not only anticipated current account deficits but also "liquidity at risk" arising from unanticipated movements and a judicious management of the capital account.

One banker opined: "If India has to confidently opt for full convertibility in the future, it will need more reserves. That could be a more critical determinant than even the status of the fiscal deficit."

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