As happened in the last fiscal, the first half of 1999-2000 seems slated to be a period of heavy bank subscription to government securities, including state loans. Non-food (business credit) will pick up only in the second half of the year. The chances are that the incremental investment-deposit ratio will remain close to last year's 32 per cent plus, well above the 25 per cent prescribed by the statutory liquidity ratio (SLR). Sustained excess investment in government securites, at the expense of business credit, is a problem that remains unaddressed.

The Centre makes the appropriate noises in this regard (calling upon the Reserve Bank to lower banks' lending interest rates), but it has budgeted for market borowings of Rs 67,218 crore thisyear, up from Rs 64,911 crore last year. It would have been a different matter if the Centre had budgeted for reduced borrowings to accommodate the states which have to borrow more to cover their pay commission liabilities.

Financial reform began by upping coupon rates on government loans to as high as 14 per cent. It was argued that by borrowing at coupon rates of 7-9 per cent (as was the case in the eighties), banks were forced to lend to government at below cost; and charge high interest on business credit. So the SLR was reduced; and coupon rates hiked.

The first did not divert incremental bank funds into business credit. The second did not lower interest on business credit; the high coupon rates on government paper raised the floor rate above which the lending interest on business credit is quoted. In fact, since investment in government paper is profitable, banks have become smug: additional non-food bank credit up to the last Friday of the fiscal year was smaller in 1998-99 than in the previousyear even though GDP growth accelerated last year.

A former advisor to the Reserve Bank says that banks suffer from "lending fatigue" (in an article published in this paper on Monday). He suggests a reduction in coupon rates from the current 12.5 per cent to, say, 10 per cent.

There is merit in this argument. Once earnings from government paper cover bare deposit and servicing costs, banks will have to expand profitable business credit. But if the prodding works, banks may not have enough to cover the mega borrowing requirements of the Centre and the states. A programmed reduction in the cash reserve ratio (CRR) could help government out this year. But next year, the CRR will have to stay put; government borrowings will have to fall.