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On Friday, January 2, 2008 the RBI relaxed prudential norms for recognition of bad loans by banks. The move will allow banks to hide their bad loans for a much longer time, even as they hope that the borrowers’ economic condition improves and they pay back or recover their dues through other means.
Enough money has been thrown at banks, industry and consumers. But none of them are showing any interest in it. The RBI has given Rs 300,000 crore in additional liquidity to the banking system, which seems like a lot that has achieved very little other than preventing a financial sector crisis. But now that banks are safe, what’s the guarantee one more round of lollies will force demand out of its hiding?
On Saturday, the RBI presented its part of the stimulus package, a combination of interest rate cuts, credit flow improvement, relief to exporters and rescuing banks from showing red ink on their books. Since mid-September, the RBI claims to have made available primary liquidity of Rs 300,000 crore. While the October crisis has blown over, when money evaporated from the system, it still does not appear as if there is money sloshing around.
India’s economic actions today resembled that of the US today: concerted action to restore confidence in the monetary system. Strange, that the system should have been exposed to be so weak when we supposedly had none of the rot that had permeated the US banking system. Makes one really wonder what went wrong. Maybe we will get to know sometime; at present all one knows is that there is a liquidity crunch, which is being blamed on various factors, ranging from rising credit demand, drying overseas fund markets, FII outflows and whatever else.
Continue ReadingRBI’s quarterly policy announcement would have normally continued with its policy stance over the past few months. But anticipation of a change or a pause had built up, given the government winning the trust vote, and inflation easing (from 11.91% to 11.89%, how does that constitute easing). The changed political and supposedly economic environment would give it legroom to pause interest rate hikes.
Indian companies would have expected some action from the RBI to hike lending rates, but the pace of change must have left them worried. The RBI has hiked the repo rate –the rate at which RBI lends in the interbank market- by 50 basis points to 8.5% and has hiked the cash reserve ratio –the portion of deposits kept in reserve by banks- also by 50 basis points.
One drawback of the Indian corporate bond market is the absence of credit derivatives. Regulatory reluctance was a main reason for this phenomenon. This had changed over the years with strong lobbying from all interested parties and the government giving a go-ahead from its side. The government had made announcements to that effect in the 2006-07 Budget and even commissioned a report on making Mumbai a regional financial centre.
Sebi too has pitched in to try and revive the corporate debt market. The lack of a vibrant secondary debt market has been one of the biggest cribs of the financial services industry. The primary market is not rocking, either. So, everyone from the finance ministry, the stock exchanges, RBI and Sebi have been putting on their thinking caps, trying to change things, over many years.