NEW DELHI, July 5: Reserve Bank of India Governor C Rangarajan is a worried man these days. The central bank had taken several steps to boost lending by commercial banks. However, credit offtake has not improved despite the best efforts of the RBI. The situation forced the RBI Governor to call a meeting of the chiefs of major banks and ask them to extend more credit to the industry last week. The RBI chief has reasons to ask bankers to extend more credit to the industry. The sluggish credit disbursals and the weak capital market scenario have already dealt a severe blow to the fund raising plans of the corporate sector. Not only this, the export growth rate has come down and industrial production has slumped to 6.7 per cent in 1996-97 from 11.9 per cent last year. Simultaneously, the woes of the corporate sector have intensified as the primary market has virtually collapsed and investors have fled the scene. Against this background, commercial banks have become choosy in extending credit. The RBI admits that non-food credit of commercial banks has declined by Rs 1,672 crore in the current year so far against a fall of Rs 6,253 crore last year. This is on top of a fall in credit growth of only eight per cent during 1996-97 from 20.1 per cent during 1995-96. With both equity mobilisation and borrowings becoming difficult, project implementation was affected. Says Shekhar Bajaj, chairman and managing director, Bajaj Electricals, ``it is not that companies don't want credit or are waiting for further decline in interest rates. Banks which burnt their fingers in sticky loans are now choosy about giving loans to companies.'' The prime lending rate (PLR) of banks has come down by around two percentage points to 13.5 per cent in the last one year. But it has not translated into higher credit offtake. The RBI had announced several measures in the last three credit policies. The latest in the series of measures taken by the RBI is to reduce the Bank Rate further from 11 per cent to 10 per cent. Although this has led to a PLR reduction, it is to be seen whether credit offtake will show improvement. ``Banks want to lend to companies which do not want money and they don't want to finance companies which need funds. After the various scams, banks are going after triple A (AAA) rated companies. In the companies rated A to B category, decision is not forthcoming. The reduction in bank rate by one per cent is a welcome decision which will only affect the cost of funds. I still feel that the process of sanctioning loans have to change,'' says Harsh Goenka of the RPG group. The dilemma on the part of banks and commercial banks is understandable. On the one hand, the system is flush with funds and banks will have to deploy it prudently. If banks are not careful in extending loans, it will add to the non-performing assets (NPAs) which have not yet come down from the Rs 40,000-crore level. This is at a time when sticky loans have eroded the bottomlines of banks like Indian Bank and UCO Bank. Big companies like Reliance Industries, Grasim, IPCL, Telco, Tata Steel and so on were able to mobilise funds through avenues like external commercial borrowings and private placement of debentures and bonds. This has left hundreds of small and medium size companies in the lurch. ``Small companies are not in a position to go abroad for ECBs or make private placement effectively. The fact is that big companies are still growing despite the poor capital market situation and tough credit offtake policy. Small companies have nowhere to turn to,'' admitted a bank chief. ``Good companies are in a position to raise funds directly from the market without any intermediaries though commercial papers (CPs), foreign currency loans and non-convertible debentures. But no new projects are coming up as the equity market is down when the financial institutions are flush with fund. A few years ago when the market was bullish, the FIs had little fund to finance projects. Without a proper combination of debt and equity, promoters do not want to start new ventures,'' said N G Ramakrishna, president, Centurian Bank. Pranam Wahi, senior manager, Corporate Banking, Standard Chartered Bank, also agreed with this about the slow credit offtake. ``It is more related to the comfort of companies in going ahead with investment in new projects for which there should ba sustained demand for products and stabilised interest rate to ensure cheap source of fund. A drop in interest has somewhat stabilised the cost of fund and the situation will be corrected within six months.'' About the general decline in demand, he added that ``you name an industry and the problem is there. It is there in motor car sales, consumer durables, and textiles. Exports have also come down. The avenues for raising cheap funds have increased. As the rupee has been stable good corporates go for external commercial borrowings. They will have to depend on high interest debt. They don't want to leverage too much and hence they are realigning their balance sheet,'' Wahi said. In fact, it was the RBI which allowed the issue of CPs and other debt instruments by the corporates. As the CP has become very popular among corporates, banks have no option but to subscribe to it. While the CP is supposed to be subscribed by individual investors, banks are the major investors in CP. It was again the RBI which allowed finance companies to flourish at the cost of manufacturing companies. They diverted funds mobilised from the market/fixed deposits to the stock markets and real estate. As a result, even genuine companies are finding it difficult to raise funds. Another reason for the slow credit offtake is the growing investment in low yielding Government securities instead of risky corporate lending. The better performance of public sector banks this year has been mainly due to the changes in the yield-to-maturity (YTM) on Government securities. When the rate of interest is coming down, the investment in these securities is also attractive. The public sector banks have been diverting their funds to the priority sector lending where the risk is relative lesser than the corporate lending. ``The growing number of frauds and investigations in the banking industry has shaken the confidence of bankers. Two years ago, lending to CRB Capital market was treated as a very good business decision. Now the situation is entirely different,'' opined Rajendra Kulkarni, chief manager (Credit), Bank of Maharashtra. R S Hugar, chairman and managing director, Corporation Bank, said the slowdown in credit offtake had been due to liquidation of seasonal credit by way of ad hoc limit granted to various industries - best example being the diamond industry. ``Alternative source of cheaper fund, especially ECB, non-convertible debentures (NCDs) is made available to corporates replacing the high cost term loan and working capital loans from banks. There is an active CP market consequent to relaxation in terms of recent RBI policy guidelines,'' Hugar said. However, the Corporation Bank chief is confident that credit flow will pick up in the second half. ``Historically credit offtake has been slow in the first half one reason why the first half is called the slack season. The situation will definitely improve in the second half,'' he said. Most of the good rated corporates which relied on NCDs, CPs and ECBs will come back to the banking sector in the second half. Improvement in the stock exchange will also encourage investment in new projects. If the petroleum prices are increased, there will be a cascading impact on the economy and the demand for credit will go up.
