Squeezed for cash

T

he proportion of loans to the outstanding deposits of commercial banks – or the credit-deposit ratio (CDR) – touched an all-time-high of 78.1 per cent as on the third week of March. This is rather unusual in times of an economic slowdown such as now, when one would expect lacklustre business activity to translate into poor credit demand and banks being saddled with deposits that cannot be easily lent out. But on the contrary, the latest CDR number is the highest ever. Measured purely on the incremental loans made and deposits mobilised over the second half of 2011-12, the ratio is even higher, at an incredible 201 per cent. It means that during October to March, banks have lent out more than twice what they collected as fresh deposits. The fact that the CDR has tended to rise especially in the last few months, coinciding with a slide in industrial growth and a drying up of investments in general, is something for policy makers to take note of.

One reason for the above phenomenon is, of course, lower deposit growth. Banks have added about Rs 20,000 crore less to their deposit base in 2011-12 than they did in the preceding fiscal. That can, to a certain degree, boost the overall CDR if there is no corresponding fall in credit growth. But that alone cannot explain new loans outpacing deposits by a factor of two in the second half, or running neck to neck for the whole of the fiscal just ended. It suggests a huge demand for credit that banks are simply struggling to meet, more so after factoring in their statutory bond investment and cash reserve requirements. That, in turn, accounts for their having to borrow heavily from the Reserve Bank of India's daily ‘repo' window, with these averaging over Rs 150,000 crore in March.

The question to ask, therefore, is where is all this credit demand coming from in the current slowdown scenario? It is quite possible that the liquidity squeeze being experienced now in the banking system may have to do with the choking of alternate sources of funds for corporates, such as external commercial borrowings, public issue mobilisations and trade credit. It is, therefore, increasing the demand for bank credit. But on the other hand, it seems also entirely possible that borrowers are encountering problems in servicing their existing loan commitments on repayment of principal and interest. That is, then, forcing banks to accommodate by restructuring the loans of such borrowers. Viewed thus, the burgeoning growth in bank assets represents essentially the conversion of unpaid interest into fresh loans. The fact that there has been a huge spurt in the number of cases coming up for corporate debt restructuring suggests a trend to this effect.