Indian companies are facing the heat of tight credit as banks hold back their lending and park funds with government bonds during this hard time of slowdown.

According to a latest data released by RBI, banks choose to invest more in government securities. They invested Rs 93,000 crore in November against Rs 18,690 crore investments in October and hence a drop in their disbursement was noticed from Rs1,09,057 crore in October to just Rs 70,000 crore in the month of November.

Banks are investing on bonds as they tend to be more attractive at the time when yields fall. When the yields drop bond prices rise and investors earn more profits by selling bonds at the increased price. The yields on ten-year government bond have dropped by more than 200 basis points from 8.4% at the end of September to 6.21%.

This drop in the yield help banks to raise their treasury profits where as a rise in loan portfolios at the time of slowdown holds a risk of non performing assets (NPAs) for the banks following which they adopt a cautious approach in their lending. Banks are slowing down their lending to the corporates at a time when borrowing options from the overseas market are also exhausted. Several top-rated corporates are raising funds the corporate bond market through non-convertible debentures at a rate lying between 11% and 13%.

This decline in the lending is witnessed at a time when RBI is continuously reducing rates with a view to help banks to offer cheap and more credit.

Ever since October RBI has been cutting down rates to ease liquidity into the system. The Cash Reserve Ratio (CRR) - mandatory deposit by banks in RBI - has been cut by 350 basis points to 5.5% and this has released more than Rs 1,20,000 crore in the system. Similarly Statutory Liquidity Ratio (SLR) - percentage of deposits that banks need to invest in government bonds - has also dipped by 100 basis points to 24%. This had also released more funds into the economy to lend.