• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• BL Club
• Smartbuy

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

Ashoak Upadhyay

Mumbai, Oct. 11 Just how deep-seated the fears about catching the credit crunch infection were in India became evident when the ICICI Bank stock fell 20 per cent at close of last week despite assurances by the Finance Minister and the Joint Managing Director that the second-largest bank was well capitalised.

That fall also brought home a dangerous psychological trap that India could fall into by succumbing to scare-mongering reports unsubstantiated by hard evidence. On the face of it, the Finance Minister’s assurances that the Indian banking system is strong, that depositors need not worry, is probably justified given the calibrated freedom for global businesses allowed in Indian banks.

In retrospect, the RBI’s caution now appears not a drag on the risk-taking by Indian banks so much as the creation of firewalls against its worst consequences. This hindsight is all the more pertinent in view of the present clamour for more active intervention by western governments to stop the slide into recession.

The British government’s plan to use £50 billion of public money to buy into three troubled banks is being hailed as the best so far, one that the US Government would do well to follow.

But the central bank’s caution cuts both ways; it appears heavy handed when it comes to dealing with a real problem that is steadily affecting the Indian economy.

For months, high interest rates have been casting a long shadow on sales, then output and now investment. Reports suggest that the non-food credit growth this year of 24 per cent could be attributed to disbursals of higher fertiliser subsidy and stepped-up borrowings by oil companies.

Banks are, in fact, cagey about lending and a slowdown in loan disbursals coincides with the outbreak of the credit crunch over the last two months. With the fall in realty stocks and housing demand since interest rates have put potential borrowers off, banks are becoming risk averse.

Some bank officials blame shortage of short-term funds for the wariness but the overall climate has turned pessimistic quickly following the Lehman crisis. Thus, even if banks do have funds, the system suffers from liquidity because of the prevailing mood.

The corporate sector sees things differently. High cost of borrowing has made them choosy, a sentiment that impacts expansion plans and therefore, on a larger scale, investment.

Either way, the result has begun to tell on industrial output, consumer sales and a slowdown in business plans. Both banks and industry, lenders and borrowers, have turned cautious; in effect, they together define a sentiment that is in stark contrast to the one prevailing a year ago.

So far both RBI, and especially the finance ministry, have been particular about assuring the nation that liquidity is not a problem and that banks are well capitalised. That is a relative truth depending on what one means by liquidity. Certainly, Indian banks are well capitalised as the Finance Minister assures us. But, the system does not have liquidity. That system is not just the equity markets from which FIIs are exiting rapidly. Every jump in the Sensex is followed by another exodus as FIIs cash in their chips. So domestic institutions are wary of putting their funds to prop up the market from which FIIs are waiting to exit.

But equally, the real economy of producers and consumers is now facing a dry spell as banks turn risk averse. High interest rates had already queered the pitch for borrowers; the lack of trust so rampant in western banks seems to be spreading across to our shores.

Neither Mr Chidambaram nor the RBI has addressed this aspect of the liquidity crunch. Simple assurances will not work here as well as they do in the case of panicky depositors.

Apart from the more liberal caps on external commercial borrowings for infrastructure and the appointment of a committee to inquire into the liquidity issue, there has been little by way of policy play to lift the gloom about to spill into the festive season.

More Stories on : Financial Markets | Financial Policy | Stock Markets

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Copyright © 2008, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line