Money matters

Mumbai, April 15: Over the past few months, banks had been moaning about the strong demand for credit and the acute liquidity crunch that had badly hamstrung their operations.

Heading into next week?s credit policy for the slack season, the Reserve Bank has come out with a set of numbers that show that the liquidity crunch isn?t as bad as was feared.

The most telling comment is that the Reserve Bank of India (RBI) has been mopping up liquidity through its liquidity adjustment facility (LAF) instead of infusing huge amounts of cash when money was short in the banking system.

The imprint of the liquidity shortfall and strong demand for credit can well be seen from the Reserve Bank of India (RBI) data on scheduled banks? statement of positions as on March 31.

While the year-on-year bank credit increased by around 30 per cent to a record Rs 14,96,473.76 crore as on March 31, 2006 from Rs 11,52,209.58 crore as on April 1, 2005, the total demand and time liabilities stood at Rs 20,87,669.61 crore as on March 31, 2006 compared with Rs 1,78,5135 crore on April 1, 2005, a rise of 16.94 per cent.

This is in tune with the trend witnessed during the year when deposit growth fell far short of the rise in advances. Bankers had complained during the year that customers? interest in bank deposits had waned due to better returns offered by competitive instruments like mutual funds.

The RBI statement also threw light on some other interesting trends during the year. Scheduled commercial banks saw a drop in liabilities to its peers. Even as the demand and time liabilities from banks came down to Rs 33,666.81 crore as on March 31, 2006 from Rs 43,507.10 crore in April 1, 2005, a drop of 22 per cent, borrowings from banks also dropped to Rs 29,511.5 crore compared with Rs 33,164.95 crore.

There may be a simple explanation for this: in a situation of tight liquidity and a strong demand for credit, borrowings from counterparts came down.

There were other interesting highlights as well. Banks investments in central and state government securities also came down to Rs 70,46,94.37 crore from Rs 72,02,55.99 crore. Their investments in other securities also declined to Rs 22,882.99 crore (Rs 20,007.02 crore).

In the last month of the fiscal year, banks attempted to ramp up advances, which isn?t a new phenomenon. The attempt to ?window dress'' their balancesheets saw total bank credit rising by 18 per cent to Rs 14,96,473 crore from Rs 14,42,590 crore as on March 17.