Column

The operations of scheduled commercial banks during the first quarter of 2007-08 make an interesting reading. Deposit mobilisation shows no signs of losing momentum in relation to the same period of 2006-07.

But unless the tempo picks up further, the indicative target of Rs 4.90,000 crore for the current fiscal may prove elusive.

But the really worrying trend is in regard to the advances portfolio of the banking system. Not only has the growth rate slackened considerably between end-March 2007 and June 29, but the actual incremental growth has also been negative thus far.

Even the investments in commercial paper - which is a proxy for credit - have been pared considerably and the story is the same in regard to total accommodation provided by banks by way of shares, bonds and debentures.

Given this scenario of swelling deposits and diminishing credit offtake, banks have naturally turned to park their funds in investments - which has increased by 7.3% in the three months ending June 29, 2007; during the comparable period of the preceding fiscal, this rate of growth was much lower at 5.2%.

This development may not be unwelcome from another angle. There is a need for many banks to shore up their statutory investments and also be better positioned to face liquidity management problems.

The operational working of banks during the past three months is thus a contrast to what it was a year ago.

The incremental increase in deposits worked out to 3.6%, which is marginally lower than the previous year’s 4.0% for the same period. This picture could change as banks still maintain deposit rates at attractive levels.

But the slowing down in lending is indeed troubling and the statistics in this respect shows steepness in the plunge in commercial advances: (-)10,815 crore unlike last year’s surge of Rs 47,141 crore.

Taking into account all other investments - other than those for purposes of maintaining the statutory liquidity ratio - like commercial paper and bonds and debentures as well as non-food lending, even the total accommodation by the commercial banking system is down considerably so far in the current fiscal and the extent of the decline is considerable - (-) Rs 37,636 crore till June 22, 2007 unlike in 2006-07 when during the same period, the incremental rise was sizable at Rs 14,290 crore.

In its annual monetary policy stance for 2007-08, the Reserve Bank had envisaged a slowing down in these investments, including bank advances, to 24-25% from the average of 29.8% during 2004-07. But with a negative trend in the first quarter, the extent of deceleration in this regard may be steeper than what the central bank had anticipated.

The essence of banking operations is best captured by the movement in the incremental variables of non-food credit and investments vis-à-vis deposit growth.

During the first quarter of 2007-08, the incremental credit-deposit ratio was (-)15.4% while it was an impressive 52.7% last year.

In contrast, the incremental ratio of investments to deposits had shot up to 60.8% this year from the year-ago figure of 44.5%. One hopes this is only an aberration and will not become a trend as the fiscal year progresses — otherwise, it may bring back the era when banks’ funds chased the safety of investments to the detriment of their advances portfolio and financial performance.