Credit flow

RBI ANNUAL POLICY 2004-05/ GUEST COLUMNS - PRESSURE POINTS

Credit offtake has picked up since the beginning of calendar 2004. Bank credit as on April 30 has increased to Rs 8,65,080 crore against Rs 7,91,989 crore on January 7. In percentage terms, the credit growth for the 2004-05 was 15.26 per cent (from Rs 7,49,878 crore on April 4, 2004 to Rs 8,65,080 crore on April 30, 2004).

However, the worry for the central bank is the credit flow is not even in every section of the industry. Bulk of the credit offtake is on account of retail boom. There have been credit growth in crore sector too which includes roads and port besides power plants.

However, small and medium enterprises are still not getting the bank credit. Even though a triple-A (AAA) rated borrower is able to raise loan cheap, banks are still shy of extending credit to small and medium borrowers as they feel that these sections are not credit worth.

A company such as ONGC has raised short-term loan at 4.57 per cent "" only 7 per cent higher than the Reserve Bank of India's repo rate. But an SME still needs to pay over 12 per cent to access bank credit. In a way, small and medium industries are subsidising rates for stronger corporates. The toughest task before the central bank is to ensure credit flow to all sections of the industry.

The Re angle

On March 31, the rupee pierced the 44 to a dollar level to touch a high of 43.40 during the day before closing at 43.65. With this, the Indian unit had gained close to nine per cent against the dollar during the last fiscal year from its closing level of 47.40 on April 1, 2003.

Its record lows of 49.08 to a dollar was recorded in June 2002. In March, the foreign institutional investors' (FIIs) fund flow increased manifold as the proceeds of the Rs 15,000 crore divestment in public sector undertakings started flowing back to the Indian shore.

The Reserve Bank of India (RBI), on its part, was staying on the sidelines of the market and refraining from buying dollars as it did not want to add to the money supply which had already breached the targeted level.

Besides, the RBI was also trying to contain inflation as an appreciating rupee would bring down the cost of import. But the scene is very different now. The central bank has started aggressively intervening in the market to stem the fall of the rupee.

The local currency breached the 46 level on Monday, but settled at around 45.50 or so on the RBI intervention. The fall of rupee has been triggered by FIIs' aggressive selling of equity in bourses on uncertainties over economic reforms under the new regime at the Centre.

In May, FIIs have already turned net sellers of equities worth Rs 2,735 crore.

If the trend continues, the RBI may have to start pumping in dollars to the market regularly.

The foreign exchange reserves today hovers around $118.45 billion, up by 57 per cent from $75 billion last year.

The story may not be repeated this year. With interest rates edging up globally and political uncertainty casting its shadow over economic reforms, flow of funds may slow down.