Banks fail to bring down rates; borrowers tap other sources

In a sort of reprimand to the banking sector for its failure in brining down interest rates, the Economic Survey said on Thursday borrowers are turning to alternate and cheaper funding sources while liquidity-flush banks are parking their surplus money with the Reserve Bank of India.

"The transmission of monetary policy measures (geared towards reviving economic growth momentum) continues to be sluggish and differential in its impact across various segments of the financial markets," said the pre-Bbudget statement on the country's economic health.

The RBI has been revising down its policy rates since the outbreak of the global financial crisis in September 2008.

While the downward revision got transmitted to the money and the government securities markets, 'the transmission has been slow and lagged in the case of credit market.'

The Survey noted that the marginal decline in the lending rates of banks public, private and foreign was 'not sufficient to accelerate the demand for bank credit.'

"Consequently, while borrowers have turned to alternate sources of possibly cheaper finance to meet their funding needs, banks flush with liquidity parked their surplus funds under the reverse repo window (of RBI)."

There have been a spurt in the borrowers, mostly corporate, tapping alternate funding sources such as through issue of debt securities, fixed-deposits and equity market.

Although easier and at times cheaper, these avenues are considered to have higher risks attached to them when compared to the bank credit.

"There has been significant increase by Rs 50,000 crore (Rs 500 billion) during April-January 2009-10 in the availability of non-banking resources, which has helped industry meet its credit needs," the Survey said, adding that contribution from non- bank sources has risen from 52 per cent in 2008-09 to 61 per cent in the 2009-10.

It further noted that the demand for bank credit remained muted during 2009-10 and some signs of recovery started showing only by November 2009.

In comparison, the growth in aggregate deposits has remained considerably higher than the rise in bank credit during the current fiscal.

"The lower expansion in credit relative to the significant expansion in deposits during 2009-10 has resulted in a decline in the credit-deposit ratio from 72.4 in end- March 2009 to 70.8 in mid-January 2010, though with some signs of revival since December 2009."

The Survey added that retail credit did not pick up in 2009-10. While the credit to agriculture grew during the year, that for industry, personal loans and services decelerated.