The Economic Survey on Thursday warned banks not to rely heavily on "low yielding" government securities at the cost of stemming credit flow to commercial sector, which was still deprived of benefits of interest rate cuts and other positive developments in the financial sector.

The pre-Budget Survey, tabled in Parliament, regretted that cuts in interest rates and increase in forex inflows have failed to result in "appreciable" increase in the credit flow to the commercial sector.

On the contrary, banks' investment in G-Secs surged to Rs 85,738 crore (Rs 857.38 billion) in this fiscal compared to Rs 63,082 crore (Rs 630.82 billion) in the year-ago period despite fall in yields, the Survey said.

"Commercial banks cannot continue to increase their investment in low yielding government securities," it said.

Banks' investment in the G-Secs now amounts to 37.8 per cent of banks' net demand and time liabilities as compared to the statutory stipulation of 25 per cent.

In contrast, bank credit to the commercial sector increased by 9.7 per cent till January 10 this fiscal compared to 11.0 per cent in the year-ago period. After including merger of ICICI with ICICI Bank, credit has gone up by 17.3 per cent.

"Growth of non-food credit has been 11.4 per cent net of mergers till January 10 this fiscal as compared to 9.1 per cent last year. With lack of credit demand, commercial banks have been investing heavily in G-Secs," it said.

Banks have been maintaining "unreasonably" large spreads around their prime lending rates mainly due to the default premiums on account of non-performing assets, it added.

"With the enactment of the Securitisation and Enforcement of Financial Assets and Enforcement of Security Interest Act 2002, an enabling environment has been created for banks to reduce interest rates," the Survey said.

The share of bank credit to priority sector declined to 38.9 per cent this fiscal from 41.8 per cent in the last year with growth in credit to SSI sector coming down.

The loans to medium and large sector and for housing urged.

In case of financial institutions, it said loan sanctions declined by 51.4 per cent to Rs 13,217 crore (Rs132.17 billion) during the first nine months of this fiscal compared to Rs 27,174 crore (Rs 271.74 billion) in the year-ago period.

RBI's credit to the government declined 31 per cent till January 2003 from 101 per cent in March end 1991, mainly due to discontinuation of issuing ad-hoc treasury bills, automatic monetisation of Budget deficit and adequate liquidity in the banking sector.

Rise in forex reserves facilitated the liberalisation of foreign exchange restrictions on current and capital account transactions, the survey noted.

Referring to the suggestions of the Committee on Capital Account Convertibility, the survey said fiscal consolidation, mandated inflation target and strengthening of financial system should be the "preconditions" for full capital account convertibility.

PTI