New Delhi: The pre-budget Economic Survey has warned banks not to rely heavily on “low yielding” government securities at the cost of stemming credit flow to the commercial sector, which was still deprived of benefits of interest rate cuts and other positive developments in the financial sector.

The survey regretted that cuts in interest rates and increase in forex inflows have failed to result in an “appreciable” increase in the credit flow to the commercial sector.

On the contrary, banks’ investment in government securities surged to Rs 85,738 crore in this fiscal compared to Rs 63,082 crore 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 10 January this fiscal compared to 11 per cent in the year-ago period. After including the 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.