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NEW DELHI, Feb. 26

THE corporate sector is in for a double blow. Companies are not only going to find fresh funding from banks and institutions hard to access, they might also have to give up hopes of softer rates for whatever little is made available to them.

The Economic Survey has not only spotted a clear pointer towards banks being increasingly risk-averse, thereby moving away from lending to corporates, it has also identified several constraints that are blocking the interest rates from sliding further from the existing levels.

In a cautious mood, banks are going in for the safer option of lending and investing in areas guaranteed by the Government. "The slowdown in economic activity had left its mark on banking activity in terms of significant increase in food credit and investments in Government Securities, both carrying a Government guarantee," the survey has said.

The Government is worried at the trend, which is leading to an excessive dependence of investment in statutory liquid ratio (SLR) securities. "The slowdown in non-food credit is a matter of serious concern. Excessive investment in Government paper may crowd out the flow of credit to the private sector, particularly when the demand for non-food credit picks up with economic revival," the survey mentions.

During April 2001 to January 2002, increase in investments in Government Securities was higher at Rs 70,555 crore as compared to Rs 49,909 crore in the same period the previous year, reflecting in a 19.7 per cent increase against 17 per cent the year ago.

The safe lending avenue — food credit — has registered a significant increase to 37.7 per cent of gross bank credit during April-October 2001, compared to 23.6 per cent in the same period the previous year. As against this, the growth in non-food credit was lower at 23 per cent during the first six months of the current fiscal against 46.2 per cent during the same period the previous year.

The development financial institutions have, on their part, kept pace with the trend showing a sharp fall in aggregate sanctions and disbursals during the current fiscal.

The survey has said that even the fall in the overall interest rate structure has not been able to buck this trend. "The beneficial impact of softening of interest rate appears to have been outweighed by the negative impact of deceleration in the real sector," the survey has opined.

It says that a further drop in interest rates may be difficult in view of the high level of non-performing assets (NPAs) of the banks, the preference by households for fixed interest rates, the administered interest rates on small savings and the large volume of market borrowings by the Government. The combined impact of these "reduce flexibility in the downward movement of real interest rates," the survey says.

It says that this rigidity could be removed by the Government by implementing the recommendations of the Expert Group on Administered Interest Rates headed by Dr Y.V. Reddy, which could "pave the way for a sustainable and flexible interest rate regime."

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