India Incs debt-servicing share shrinking

Written by Banking Bureau | Mumbai, Mar 28 | Updated: Mar 30 2008, 04:39am hrs
Rakesh Mohan, deputy governor, Reserve Bank of India has said, though the pattern of funding by the banks remains skewed towards larger firms, the share of debt service in corporate balance sheets has been getting lower and lower.

The problem for the banks is that profit growth in the corporate sector has been so high in recent years that they do not need much bank borrowing, said Mohan at a function organised by Entrepreneurship Development Institute of India in Ahmedabad on Friday.

In fact, in view of the reduced need of large firms for bank funding, there is great competition among banks to fund the incumbents, to fund larger firms, leading to lending rates levied on them becoming much lower than the declared benchmark prime lending rates (BPLR), Mohan pointed out.

This is in some sense an encouraging sign, so that if banks do not have enough income generation from larger firms, they may be willing to lend more to newer entrepreneurs, observed Mohan.

According to Mohan, high growth in profits of the corporate sector suggests that competition is inadequate and that entry of new firms or even the threat of entry of new firms is low. Growth in output is being driven more by expansion of existing firms rather than through the creation of new firms.

This pattern would suggest that new firms are not finding it easy to access funds from the banking system at reasonable risk adjusted rates. It is essential that banks should be careful in their risk assessment, and that the interest rates charged and volumes of funds lent should reflect the risk assessed.

First, the pattern of funding from banks is predominantly to the urban and metropolitan sectors, which account for the overwhelming share of credit.

The share of metropolitan areas, in fact, has risen further in the current decade, with that of rural and urban areas declining, he concluded.