The first green shoot

The recession in industry, now stubbornly into two years, may yet lift. Commercial bank credit is on the rise, though by less than that proj...

The recession in industry, now stubbornly into two years, may yet lift. Commercial bank credit is on the rise, though by less than that projected by the Reserve Bank. But this time round last year, bank credit to the commercial sector had been stagnant. Credit expansion, which accelerated in the third quarter of this fiscal, has been unexpectedly good.

October saw but a small rise in industrial production; this was way below that recorded in October 1996. Could it be that industrial growth has picked up after October? Perhaps; perhaps not. Industrial statistics capture production in the organised industrial sector. It may be that production has picked up in the unrecorded, unorganised sector. However, acceleration of the organised industrial sector cannot be ruled out: four years ago, there was an investment spurt in the organised sector; the consequent decline in capacity utilisation is now undergoing a reversal. On this reckoning, the turnaround in industry should become visible in the next six months or so.

The credit spurt of the third quarter could be the first green shoot. This is no accident. There has been a sea change in bankers’ perception. Gone are the days when commercial banks could blindly place their rising deposits in government securities. These fetched the banks 14 per cent.

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The investment, besides attracting a handsome mark-up over cost of funds, was risk-free. Banks turned away commercial borrowers with impunity. But times have changed. Government paper fetches 9 per cent. This is close to the cost of bank funds. And if banks continue to invest more in these risk-free assets, the return they will earn will dive below cost. So, banks are willy-nilly going in for commercial credit. To start with, they will look for lending where the risk of NPA is negligible. But soon banks will have to learn that banking is all about taking intelligent risk. The phase of blanket denial of funds to commercial borrowers is over. Banks have started to woo them.

Besides, top corporates have learnt a lesson. The option of tapping commercial borrowings abroad is no longer attractive, not after taking into account the risk of rupee depreciation. There is no knowing how long the rupee will be stable at a particular level, nor how far it can depreciate. Corporates are now turning to domestic banks.