Such large investments in government securities well beyond the statutory requirement reflect dissipation of banking knowledge capital with regard to credit appraisals. The interest rate risk on investments in gilts need hardly be over emphasised. Further, the current focus of banks is bound to exact some heavy costs in terms of efficiency and credit availability.
There is a danger of the link between liquidity, credit, money and economic activity being severed in the long run as a result of continued over-investment in government securities as a substitute for bank financing to the commercial sector. At a time when the industry is showing signs of pick up, banks should make efforts to increase commercial lending.