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Missing liquidity

Akhilesh Bhargava

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Money is extremely scarce at present in the Indian economy. Experts say that India is passing through its worst liquidity crisis, of the past five years. It is not that Indians are not earning/saving enough, or that there is a shortage of currency in circulation in the system, (it is in fact at a record high), but for those businesses that desperately need it, the money is missing. As the economic growth surges in India, so does the demand for funds to finance larger turnovers and if the needed funds are not made available to businesses on time, the nation’s economic growth does not get consistently sustained on a quarter to quarter, as we have often witnessed in the Indian economy, in recent times.

The liquidity crisis that we face, has primarily to do with the unprecedented crisis that India’s banking system faces and which defies resolution. It is not just a crisis of resources, where banks have lost their substratum capital to gigantic NPAs and have little to lend or that many of them are under RBI’s PCA which entails lending restrictions, but it is also a huge crisis of confidence that the system is rife with, after having indulged in corrupt and reckless lending for years (resulting in a NPA mountain of over Rs.10 lac crores). The bankers are a confused/chaotic lot today, having lost the confidence in their own ability/expertise to do clean/credible credit appraisal/due diligence and to lend only to those who are creditworthy. With many CBI/SFIO investigations looming in the background, bankers are also unwilling to indulge in fresh lending. Their dilemma is, why to lend and face criminal agencies, in case the loan turns bad.

What has further slowed the credit offtake and lending is that the bank lending norms in terms of security/collateral security and promoter margins have become so tough and onerous, that few borrowers are able to comply with them, such as to be eligible to avail of loans from the banking system.

The Reserve Bank of India, together with the SBI, has been pumping money into the system, in order to improve the liquidity position. Last month the RBI/infused Rs.32000 crores into the banking system for onward lending. It proposes to put in a further Rs.24000 crores into the system, in a similar manner. It is also encouraging banks to pick and choose and buy out the portfolio of assets of NBFCs and provide funds to them for further lending. The top 15 NBFCs in India are reported to have an asset portfolio of about Rs.5 lac crores, which can be securitised/monetised by banks, thus providing further funds to the borrowers. SBI has announced that it will purchase such assets worth Rs.45000 crores from NBFCs in the FY 2018/19. Such measures will bolster the funds available with banks and NBFCs, for further onward lending.

These are emergency measures, which will only provide temporary relief and are not enough. Until the banking system is not recapitalised and revived, not just financially, but operationally too, the liquidity crisis that we face will only persist. Bank credit growth has been falling and so is the liquidity/funds available in the system. If not tackled quickly and appropriately, the nation’s economic growth will suffer again, after having been rejuvenated with great difficulty.

 

Business Tit-Bits

The Burden of Infrastructure NPAs

Akhilesh Bhargava

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As the country is the midst of an NPA crisis, we find that resolution are hard to come by. The only resolutions are from the Steel and Metal sector. The sector which forms the crux of the NPA crisis in India is the Infrastructure sector which accounts for roughly 25% of total NPAs. Infact, so serious are the NPAs in this sector that 1/4th of loans given turn bad and total around 2.5 lakh crore Rs. Loans given in the period 2009 to 2012 were found to be the worst. Infrastructure loans include loans given for construction of roads, bridges, highways, ports and power sector loans. Corruption, government not living up to its end of the deal and banks rushing to give loans without going through boanfides of the firm are the main reasons. The infrastructure sector bad loan problem has turned into a chronic one and no resolution worth talking about has taken place.

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Business Tit-Bits

The Diamond Cheats

Akhilesh Bhargava

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We take a look into the glamorous diamond industry in India, said to be the largest in the world. Being a very close-knit one in terms of belonging to a particular community and often only within family members, the scope for manipulation becomes easy. The diamond industry has become tainted with bogus exports, money laundering practices, massive NPAs, round-tripping of money etc. Names such as Jatin Mehta, Mehul Chokshi and Nirav Modi have become synonymous with the industry and hence banks are now restricting their exposure to the sector and implementing tougher conditions for lending money to the beleaguered diamond traders.

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Business Tit-Bits

Why Mr. Jaitley should stop the reckless tax prosecution?

Akhilesh Bhargava

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As many industry and tax associations approach the Revenue Secretary for help to prevent income tax authorities from unfairly harrasing and prosecuting them for minor discrepencies, we ask Mr. Arun Jaitley why is this being done. This culture of “prosecution raj” is hurting small and big businesses alike and is sending the wrong message to India Inc. Giving arbitary powers and setting not only revenue, but also prosecution targets for income tax officers is unfair and businessman are bearing the brunt of this. In addition to penalty and interest, other prosecution punishment is being handed down for the most minor of offences which is leaving a bad taste in the mouth of industry at large.

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