The current economic environment which is sluggish in industrial production and new projects has resulted in poor credit absorption both for long-term funding to big-ticket projects as well as working capital. The slowdown in the economy as well as lending to corporates at unjustifiable rates taking into account the banks' cost of funding, operating cost and risk premium has resulted in limited lending opportunities to banks. Major portion of the loans raised by corporates were to replace the existing high cost funding and is more in the nature of arbitraging on the interest rates with various banks. The loan products to corporates with strong financials now are almost linked to prices of government securities/or mark-up over government paper.

For the first time, corporate bond yields of `AAA' rated instruments slipped below 7%. The banks can draw on the investment fluctuation reserve to account for depreciation on government securities but the same cannot be used for corporate papers which may turn out to be a burden on the balance sheet, if interest rate hardens. Interest rates continue to remain soft and trading profits in the first half-year of FY02 are in line with FY01. The gains, however, would start getting neutralized when there is a rise in interest rates. The emerging prudential norms, wherein NPL recognition would move down from 180 days to 90 days has also resulted in banks moving away to other avenues of deployment of funds, which would result in better risk-return trade-off and a well-diversified credit portfolio

A New Prospect, Economic environment, industrial production, big-ticket projects, unjustifiable rates, operating cost, risk premium, lending opportunities, interest, government securities, `AAA' rated instruments, FY02, FY01, neutralized, emerging prudential, NPL recognition, deployment of funds, risk-return, trade-off, well-diversified credit portfolio.