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Lending rates set to come down further

While conceding that financial sector reforms have rendered the business models of developmental financial institutions unsustainable, the government said lending rates were expected to come down following the enactment and enforcement of the Securitisation Bill, cleared by Parliament last week.

"Financial sector reforms, involving interest rate deregulation, increased competition from banks, and lack of concessional funds, have rendered the business models of developmental financial institutions unsustainable," the mid-year review said.

In the review tabled in Parliament today, the government also said amendments to the Securities and Exchange Board of India Act would improve the market perception on effective regulation of the capital markets.

It said the Sebi Ordinance was promulgated because in recent years, episodes of market misconduct had identified limitations in the legal provisions of the Sebi Act. Furthermore, the growing importance of the securities market in the economy had placed new demands on Sebi, the review said.

The domestic capital markets remained subdued with only six issues worth Rs 952 crore (Rs 9.52 billion) during the first half of the fiscal, compared to 12 issues (worth Rs 2,360 crore) in the corresponding period last year. Similarly, net resources raised by mutual funds during the first half were much lower.

It also said the sharp drop in sanctions (51.6 per cent) and disbursements (46.2 per cent) by all-India financial institutions during the first half of the financial year reflected the weak financial position of institutions like the Industrial Bank of India and IFCI and the spread of universal banking.

The government pointed out that the 15.7 per cent growth in non-food credit pointed towards a recovery in the economy. Net bank credit to the government in the first half of the current fiscal grew 7.2 per cent compared to 10.7 per cent during the corresponding period in 2001-02.

On the other hand, bank credit to the commercial sector witnessed a growth of 11.3 per cent, compared to 4.4 per cent in the corresponding period last year. The pick-up in bank credit to the commercial sector was more pronounced in the case of the non-food sector. On the deposit side, from April to October 4 this year, the aggregate deposits of scheduled commercial banks grew 12.6 per cent as against 9.54 per cent during the corresponding period last year.

The government took credit for some of the reform measures initiated by it during the first half of the year. These included restructuring of the Unit Trust of India, promulgation of Ordinances on Sebi Act amendment and Securitisation, Reconstruction and Enforcement of Security Interest, which had subsequently been cleared by Parliament.

The report said progress had been made in resolving the problems of UTI. It said the net asset value-based schemes of UTI did not pose difficulties, while in the case of US-64 the shortfall at the end of May 2003, with an NAV of Rs 6.48, was estimated at Rs 5,522 crore (Rs 55.22 billion).

The review also said the government proposed to repeal the IDBI Act to facilitate its transformation into a bank, while it intended to take measures in IFCI.

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