New Delhi, Mar 31 (UNI) Expressing concern over the reported move of banking institutions to go slow in disbursing term loans and sanctioning of fresh loans to corporates in the wake of the liquidity crunch, The Associated Chambers of Commerce and Industry of India (ASSOCHAM) today said any check on credit schemes would reverse an impressive industrial growth achieved by the country in the last few years.
The Chamber said while it is true that that the credit growth has been over 25 per cent for the last two years, it should not be cause for concern for bankers since the increased requirement for cash is based on sound economic fundamentals.
''I am not saying it. Bankers themselves are stating that their credit portfolio is highly diversified which mitigates any possible downside risks. But if the industry and the services sectors are starved of the funds needed for their growing business and investment requirements, it would certainly stunt the overall GDP growth,'' ASSOCHAM President Anil K Agarwal said.
The solution to the credit-deposit mismatch lies in releasing more liquidity in the market since inflation continues to remain well under control below five per cent.
The industry chamber is of the opinion that the bankers have rightly made out a case for reduction of the Cash Reserve Ratio (CRR) by 2 percentage points by the Reserve Bank of India.
The Chamber has also asked for recourse to all the tools that are available with the central bank to pump in the required liquidity into the growing economy.
''The Market Stabilisation Scheme (MSS) should be fully tapped and the Liquidity Adjustment Facility (LAF) must be further liberalised,'' Mr Agarwal said ahead of the annual Credit Policy Review by the RBI.
However, one of the main concerns is that, banks are required to park a slice of their deposits as cash with the RBI and invest a significant portion of their liabilities in liquid investments like government securities. Consequently, the banking system has excess funds locked up in government securities under the mandatory 25 per cent Statutory Liquidity Ratio (SLR) requirement.
These funds could be released to ease the pressure on liquidity as there is excess SLR of 6 per cent above the requirement of 25 percent. There is the need to take policy action on the excess Statutory Liquidity Ratio maintained by the banking system i.e. the banks holding in excess of the mandatory SLR can sell part of their government securities investments.
In the backdrop of the prevailing liquidity crunch in the banking system, the banks are going slow in disbursing term loans and sanctioning fresh loans to corporates. Banks are reportedly working on strategies, where they intend to grant loans only to the most profitable avenue, i.e. the retail borrowers are getting preference over corporate clients. This is not a healthy trend for industrial growth, particularly in the manufacturing sector, which has been projected by the Finance Minister P Chidambaram to grow by over 12 per cent, Mr Agarwal said.
He also expressed concern over the upward movement of interest rates which could also come in the way of further improvement in the investment climate.
Between March 2003 and early 2006, the prime lending rates for the public sector banks have gone up from 9 per cent to 10.75 per cent.
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