Low Savings, High Demand for Funds

EPW Research Foundation Low Savings, High Demand for Funds Liquidity Strain: Experience
THE financial year just concluded has faced certain unusual features in regard to the tight liquidity situation. The high growth of bank deposits and other financial instruments in 1993-94 and 1994-95 in the wake of sizeable foreign currency inflows gave way to sluggish growth in 1995-96 as these inflows were arrested. Domestic savings appear to have been unequal to the high level of demand forfunds from the government and corporates alike stimulated by earlier liquidity inflows. As against the targeted Rs 65,000 crore (17 per cent growth), aggregate bank deposit accruals are likely tobealittleoverRs 50,500 crore (13.1 per cent). Funds mobilised by mutual funds during the year are estimated to be about 58 per cent lower than in the previous year (Table 1). On the demand side, apart from the sizeable market borrowing requirements of the government and intensified needs of the corporate sector, a major factor that has put tremendous pressure on liquidity has been the demand placed on the market in the form of primary issues of bonds and equities by banks and financial institutions (Fls), essentially for satisfying, particularly in the case of banks, their capital adequacy norms, A tentative compilation suggests that the banks and FIs raised nearly Rs 9,000 crore in 1995-96. Besides reducing the availability of funds for the government and the corporate sector, such demands by the purveyors of credit themselves have given rise to unpreccdentedly high levels of interest rates.