The Telegraph
Since 1st March, 1999
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Banks set sights on small units

New Delhi, May 17: Funds-flush banks are targeting small and medium enterprises (SMEs) and individuals looking for home loans and advances to buy consumer durables in an attempt to ratchet up credit offtake at a time when corporates are showing greater reluctance to borrow.

Cash is swilling about in the financial sector after the Reserve Bank slashed the bank rate -- the rate at which it lends overnight funds to banks — by 25 basis points to 6 per cent.

The central bank also slashed the cash reserve ratio (CRR)-- the proportion of deposits that banks must keep in cash with the central bank — by a quarter percentage point to 4.5 per cent, effective June 14. The twin measures have released another Rs 3,500 crore into the banking system — putting pressure on banks to find the borrowers for the extra cash.

Officials say the cut in the bank rate to its lowest level since 1971 in an attempt to spark an industrial recovery has now put pressure on the commercial banks to find the borrowers for the extra cash.

Credit demand from large corporates has dried up in the face of lower 5.8 per cent industrial growth. Data released by the apex bank shows that outstanding loans by banks fell 1.4 per cent to Rs 7,314.29 billion in the month to April 25.

K Cherian Varghese, chairman and managing director of state-run Corporation Bank, said in the current situation, home loan advances would be the top priority of the bank.

“No new industrial projects are coming up and consequently corporate credit offtake has been meagre,” he said.

Analysts felt better management of inventories, logistics along with improved supply chain management by large corporates have led to poor credit demand.

“This has led to a structural shift in working capital demand,” said an analyst with a global consultancy firm. “It would be small and medium enterprises rather than large corporates which would drive credit growth.”

“But the stimuli provided by interest cuts are over,” he commented.

“And even though consumer credit loans would record a growth, overall, it does not add to the bottomline as these are small advances.”

The RBI recently said demand from individuals taking advantage of current low interest rates to buy assets such as homes and cars on credit has been strong.

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