The central banks provisional data on the commercial banks balance sheet mirror the tight liquidity situation emanating from twin circular debt and low foreign inflows amid the seasonally low credit requirement during the first quarter of calendar year 2010.
Although, bank deposits grew at much lower pace than the peak lending season in the previous quarter (6.8% growth), it increased by 2.3 percent or Rs100 billion in the quarter ending March, compared with a growth of 0.03 percent in the same period last year.
Similar trend is being observed in fresh lending; gross advances, which were down by 5.6 percent during Jan-Mar 09, eased only by 0.6 percent during Jan-Mar period this year.
In the meanwhile, the provisioning against bad loans increased by a staggering Rs36 billion (15 percent) from December-end levels. The provisioning-to-gross advances ratio soared by 120 bps to 9 percent during the last three months.
The gross infection ratio, which had declined by 21 basis points during fourth quarter last year to 12.15 percent, might continue its downward journey. The higher provisioning numbers could be attributed to a better coverage ratio owing to increase in loans payments due over one year, which requires full provisioning.
But there is little that banks can do to turn the situation around. The economy is clearly faring better than the similar period last year, but, the cash-starved banking system is in a dire need of high doses of liquidity injection.
The crowding-out of private investment is likely to increase in coming months, unless the pending foreign funds materialize.
The fresh procurement of wheat targeted at 7.5 million tons by public agencies and provinces requires Rs175-200 billion worth of fresh financing from commercial banks. On the flipside, banks argue that their exposure limit to commodity financing will be hit, which is at a staggering level of Rs271 billion as of March 27.
Similarly, after issuing two TFCs amounting Rs165 billion last year, commercial banks are reluctant to enhance their exposure to the energy sector, whereas on the flipside, energy circular debt has surpassed Rs200 billion, according to industry sources.
Since, the need of wheat procurement and uninterrupted import of furnace oil is imperative for economic and social survival, a quick and amicable solution is the need of the hour. One solution is to convert existing commodity credit to long-term bonds and issue a Sukuk to reduce energy woes.
And because the government has kept on rolling its liabilities with commercial banks, the lenders are in a position to negotiate a higher premium for the quasi fiscal financing. This is a double whammy for the industrial sector; they are not only left with a smaller credit pie but also have to have it at a higher cost.
It may be premature to say that how much will the banks inject in commodity and energy sectors, but surely the pie for private sector is squeezing.
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