I’ve been experiencing a ‘JP Morgan moment’ of sorts in recent days, and it doesn’t make me feel good at all. Don’t get me wrong: I’m not rich beyond measure — and, for the record, if I were rolling in the stuff, I’d definitely feel good about it. But what puts me in mind of that uber-rich banker from New England are the flashes of epiphanic insight I’ve been having lately, which are centred around a (probably apocryphal) anecdote relating to ‘JP’ from the go-go years of the Wall Street boom of the 1920s.

The story goes that Morgan, who had been making money hand over fist in the stock market euphoria, was sauntering jauntily along Broadway, puffing on a cigar, when he stopped to have his shoe polished. The shoeshine boy evidently got very chatty with JP, and made bold to offer him — the legendary banker — some stock market tips. At which point, Morgan hoofed it back to his office in double-quick time, his coat-tails flailing in the autumnal New York wind, and sold off all his stocks, reasoning that when a stock market mania had percolated down to shoeshine boys, the bubble was about to burst. It did, and the US tumbled into the Great Depression, from which it took over a decade to claw out.

Like I said, it’s probably a made-up story, but even so, it makes a compelling case for caution when money comes stampeding in.

My own sense of disquiet has been triggered in recent days by the super-abundance of unsolicited offers I’ve been receiving, on mail and on phone, for “instant personal loans”. The time-scale for this excessive eagerness on the part of lending institutions to thrust money into my unwilling hands coincides near-perfectly with governmental directives to public sector banks to boldly go forth and lend in order to keep credit circulating in the economy and revive the consumption spirit. With the Reserve Bank of India (RBI), too, signalling lower interest rates, the liquidity tap appears to have been opened fully in the hope of getting people to spend, even if it is on borrowed money.

To me, these are symptoms of ‘peak liquidity’ — and, in the same way that a shoeshine boy’s stock tip sent alarms jangling in JP’s mind, they point to trouble ahead.

But I’m not even sure how persuasive these policy nudges will be in getting folks to loosen their purse strings, given the downbeat mood of the moment. Even in this season of festivities, with discounts aplenty and credit available on tap, the cheery spirit is conspicuously missing. All around me, in workplaces, there’s an ill-wind that’s blowing, and it’s showing up in the form of outright layoffs — or in inadequate wage growth.

At a macro level, it has compounded the misery that was earlier manifest in the informal sector as the effort to drag it, kicking and screaming, into the formal economy was under way. And at the individual level, in times such as these, prudence dictates that any disposable income will — or at least should — go into saving up for the prospect of harsher days, which seems a distinct possibility. This is definitely not the time for money-wise folks to borrow or to binge.

In fact, the only ones who will likely be attending the “shamiana gatherings” — of the sort that the Finance Minister had suggested to public sector banks — are those who are so financially straitened that they think nothing of borrowing yet more to stay afloat (and who, therefore, cannot conceivably hope to repay, even if they intend to) — or, worse, those who intend to wilfully abuse the lower threshold for credit availability (and so have no intention of repaying at all).

This is just a train wreck waiting to happen — in slow motion, and in technicolour. In fact, this lending model faithfully abides by the ‘loan mela’ template of the 1980s — which blotted the balance sheets of public sector banks so badly that they didn’t recover for over a decade, and even then only by throwing giant wads of taxpayers’ money to recapitalise the banks.

From an economic perspective, a lending binge, of the sort that the government is pushing to get the engines of the consumption economy fired up, is akin to a gluttonous excess. It will almost certainly lead to indigestion, to recover from which will require extended medicinal ministrations and an enforced dietary regimen of spartan simplicity. Many of our banks are in just such an exacting treatment regimen: Even so, they haven’t yet fully worked off the malefic effects of reckless lending in earlier times.

As the recent revelations in respect of Punjab and Maharashtra Cooperative Bank, particularly its excessive exposure to down-and-out real estate players, suggest, the contagion is still spreading through the financial system. Faith in the robustness of the banking system runs so low that wild rumours on social media platforms about the stability of specific financial entities find easy credence. So much so that the RBI has had to put out repeated clarifications to becalm the frayed nerves of depositors.

In such a scenario, the government’s ‘loan-mela’ diktat only sets the stage for the next bout of financial indigestion. I guess I’ll take my cues when shoeshine boys start handing out flyers for ‘instant personal loans’.

 

BLINK-VENKY

Venky Vembu

 

Venky Vembu is Associate Editor, BusinessLine

e-mail: venky.vembu@thehindu.co.in

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