Public sector banks (PSBs) currently seem to be preoccupied with the following four tasks: setting up an asset-liability management (ALM) system, trading in gold, trading in derivatives and lending long-term.

This is because, first, the Reserve Bank of India has advised banks to put in place an ALM system by April 1, 1999, for enabling them to manage interest rate and liquidity risks in a scientific manner.

Second, the finance minister had announced a new gold deposit scheme designed to mobilise idle gold in his budget speech on February 27. Select banks have been permitted to accept gold deposits from the public and issue interest-bearing certificates or bonds which, on maturity, can be reclaimed in gold. For the country, such recycling of idle gold is expected to reduce our dependence on imported gold. But this is bizarre, because one can ask why, in the first place, shouldwe be encouraging the import of gold on a massive scale frittering away forex worth $6-7 billion a year?

Third, with the parliamentary standing committee on finance approving, with some changes, the Securities Contracts (Regulation) Amendment Bill, the stage is set for the introduction of derivatives in India. Trading in derivatives is expected to bring our markets one step closer to international standards and the PSBs are preparing themselves to trade in derivatives.

Fourth, banks are not content to lend only working capital but would like to get into long-term lending business. Thus, the issue of harmonisation of the role of development financial institutions (DFIs) and of banks has become a subject of heated debate. I would submit that these issues, important by themselves, reflect warped priorities and in fact they have succeeded in crowding out, from the credit policy agenda, the core issue confronting PSBs, namely, "lending fatigue". RBI would do well to focus its measures, to be announced in itsApril 1999 meeting, on curing this basic malaise of PSBs.

Obsession with raising Indian banks to international standards should not supersede domestic policy agenda. The "lending fatigue" of PSBs -- reluctance of banks to lend -- is clearly reflected in the credit-deposit ratio of banks which has been hovering around 50 per cent during the last couple of years. This state of affairs is not an aberration but an abiding feature which clearly indicates sub-optimal use of the banking sector's resources.

For example, the expansion of non-food credit in 1998-99 (up to end of February 1990) at Rs 23,117 crore was much lower than the figure of Rs 29,783 crore during the corresponding period of 1997-98. Why should such deceleration in credit offtake take place when growth in GDP is estimated to much higher at 5.8 per cent in 1998-99, as compared to the five per cent recorded in 1997-98? In other words, an ocean of liquidity in the banking system co-exists with large unsatisfied demand for credit.

Rough estimatesindicate that some Rs 65,000 crore of excess liquidity is parked in government securities. It should be the overriding priority of credit policy, under these circumstances, to wean this excess liquidity away from consumption by government and divert it for utilisation by the productive sectors of the economy. In terms of concrete measures, the problem can be tackled through two sets of measures.

First, one must reduce the attractiveness of government securities to PSBs. In fact, one of the important factors which has led to the parking of massive excess liquidity in government securities was the disproportionately high yield. At one time, not long ago, the maximum yield was 14 per cent. Thus, it became convenient for PSBs to put the bulk of their resources in this instrument which is a zero-risk and zero-transaction cost instrument.

This saved the PSBs the bother of appraising a large number of applications for small loans, monitoring loan disbursals and ensuring repayment.

Although the maximum yieldhas been brought down to some 12.5 per cent recently, this is not enough. The maximum yield on government securities should be reduced to say 10 per cent.

The second factor identified by the Narasimham Committee on Banking Sector Reforms is the "fear psychosis" among bank personnel at the middle and higher managerial level about new lending. The morale of the staff has been affected by the fear that they may be held responsible for alleged mala fide actions in the event of loans or investments turning bad. Thus the present paralysis in lending by PSBs is attributable to the fact that managers prefer to take "no decisions". The Damocles sword hanging on managers should be removed.

RBI should, therefore, indicate that PSBs should endeavour to raise their present credit-deposit ratios by, say, five percentage points over the next six months. Since there are large inter-bank variations, the broad guidelines would be bank-specific; and these could be spelt out in the credit budget discussions with individualbanks. Of course, weak banks will have to be excluded from this exercise. The macro objective should, however, be clear. While indicating the broad credit-deposit ratio targets, it is desirable to indicate the thrust areas.

Last year, the RBI provided the guidelines for lending to the information technology (IT) industry, in which PSBs have not taken much interest so far. Then again, the target for direct lending to agriculture of 18 per cent of net bank credit should be reached by all PSBs.

A new hi-tech segment has emerged in the rural sector: aquaculture, floriculture, tissue culture, greenhouse farming, exploitation of wind energy and so on. PSBs should lend aggressive credit support to the perfectly bankable projects in this segment.

Considerable progress towards decentralisation of development administration has been made by some states like West Bengal and Kerala. In Kerala, 40 per cent of annual plan outlay devolves on Panchayati Raj Institutions. PSBs should start a dialogue with theseinstitutions for identifying bankable projects.

Overall, PSBs should reinvent themselves and begin again dirtying their hands in the business of development.