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| Banks should be cautious with credits | | | Ram Kumar
India is still largely an agricultural country, although some Indian economists were not willing to acknowledge this and said a few years ago that the Indian economy “does not depend on the monsoons.” Indian suppliers of goods and services have varying degrees of exposures to the western market ranging from 20 per cent to 75 per cent (in case of IT).With western economies showing low or negative growth, demand for goods and services from India also goes down.
There is however a silver lining: western enterprises are likely to reduce their cost by retrenching highly paid employees in their country while keeping poorly paid employees in India through back offices and IT services.
Government intervention in the West and in India has been limited by the range of options they have. Interest rates have been changed by the Federal Reserve and other central banks have been used to put more liquidity or money in the hands of banks to finance and kick-start some parts of the economy and the stock market. In India, ‘the Cash Reserve Ratio’ has been lowered to leave more deposits in the hands of banks. There are however limits to what this can achieve without involving tax payers’ money. Therefore, governments supplement the efforts of central banks by providing direct bailouts to banks and other institutions in various forms like buying shares and extending loans.
We in India did this some years ago; The government used tax payers’ money in thousands of crores to recapitalise some Indian banks with high NPAs. Tax payers’ money in large measure was also used to prevent the collapse of the UTI. The West is following this example, but there is no sign of more regulation.
We learnt our lesson early enough to impose strict CRAR (Capital Risk Rated Assets Ratio) on Indian banks which has limited their loans with different risk ratings as a proportion of their capital. The recent reduction in CRR and SLR and lower repo rate have all placed above Rs. 85,000 crores at the disposal of the banks. The banks already have access to funds, which they borrow from the public, and they are raising deposit rates to attract more such funds. With disbursements under the Sixth Pay Commission recommendations more people are inclined to place their money in banks rather than in shares. The banks find that merely increasing liquidity or money in their hands does not enable them to lend for projects of different risk weightage within the limits set by the CRAR.
If they lend indiscriminately because they have the money, or because the government wants them to do it, they will again run the risk of having high NPAs. This can happen in agriculture, industry, infrastructure and project lending fields.
An excess of liquidity in the banks and public will lead to inflationary pressures and other problems will be created for the government. Inflation will create hardship for the people and affect electoral prospects. The fiscal deficit of the Central Government has already gone way beyond to the target of 3 per cent and is heading towards the 9 per cent mark. The current account balance is in the negative and will grow owing to falling exports.
With the limitations and the leverage available to the government and the central bank, a certain amount of shrinkage in employment opportunities in India, particularly to white collar workers is to be expected at least for a year.
Efforts should be made to expand employment in agriculture and in industries with potential in domestic markets.
Agricultural exports can substitute for fall in industrial exports to the west. Infrastructure investments jointly with the private sector should be speeded up and made more bankable to access institutional credit. Innovative financing along with marginal interest subsidies may help. |
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