If banks are chasing gilts like there is no tomorrow, it is because companies have become more efficient. There is no demand for bank funds because India Inc does not require working capital any more.
According to the Centre for Monitoring Indian Economy (CMIE), the working-capital cycle of manufacturing companies came down from 60 days in 1990-91 to 21 days by 2001-02. It fell to 14 days in 2001-02 and became negative in 2002-03.
A company reaches a negative working-capital cycle when it uses suppliers' credit or customer advance payments to fund daily operations. As a result, its dependence on bank finance for operations comes down.
A negative working-capital cycle reflects that companies do not need funds to meet their operational needs because they have become more efficient.
There is a correlation between the working-capital cycle of manufacturing firms and investments by banks in gilts. For most companies, the working-capital cycle has turned from an average of 14 days in 2001-02 to negative in 2002-03. The investment of banks in government securities has also shot up to Rs 1,04,775 crore in 2002-03 from Rs 67,832 crore in 2001-02.
The increased pressure on banks to park their surplus funds in gilts has translated into a drop in yields. Yields on government securities fell 300 basis points in 2001-02 and a further 200 basis points in 2002-03.
Reserve Bank of India norms require banks to park 25 per cent of their net demand and time liabilities in gilts. However, most banks park as much as 39-40 per cent of their net demand and time liabilities in government paper because there is no demand for credit.
Manufacturing companies, especially automobile companies, focus on supply-chain management to increase production efficiencies and use suppliers
