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Apropos the article “Financial crisis: What India needs to do” (Business Line, October 15, 2008), the crises faced by western banks are different from that of Indian banks.

Some of the western banks face the problems of solvency due to the collapse of their economies and the consequent liquidity crisis.

While the effects of the crises are exported to other countries, including India, the problems faced by Indian banks are that of liquidity only, as our banks are well capitalised and well regulated.

Besides, the Indian economy is in the growth mode, though the rate of growth may slow down due to global macro factors and domestic infrastructural constraints

The liquidity crisis in the Indian banking sector has arisen due to the shrinking of international credit market and the relative increases in the cost of the same.

It is because of this that domestic industry is not able to access the international markets. In addition the stock market crash has ensured that industry is not able to access the bourses for additional capital needs for expansion and growth requirements. The result is that they expect the tested intermediaries — banks — to meet their additional requirements.

The banks themselves are in a bind due to the locking of 34 per cent (since reduced to 32.5 per cent) of funds in SLR and CRR requirements and contraction of international credit due to the crisis of confidence about each other.

The situation, if unchecked, may lead not only to contraction of growth but also to the bankruptcy of smaller and weaker firms due to their inabilities to meet their liabilities in time.

It, therefore, makes sense to increase the liquidity of the banks by relaxing the CRR and SLR requirements further and by decreasing the repo/reverse repo rates to save the economy.

P. Esakki Muthu Mumbai

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