Trickle Down Credit Growth

This article has been written by Amrit K.N. Pradhan. Amrit is a student at Rajiv Gandhi National University of Law, Patiala.

  • Capitalism, 2008, Kuznets.
  • Bad banks, arcs – made too fail.
  • Bank managers, Wells Fargo.
  • Nous strategy.
  • 4,000 CRISIL-rated MSMEs ITES sector – 12% growth compared to their peers ins ervice sector for an average of 20% – diversify (hardware, customised apps, providing consultancy) – cash – based funding model-low.

It has not been over two weeks since the new Monetary Policy Committee-led by new RBI Governor cut rates “unexpectedly” by 25 basis points (.25 %). The Indian duopoly of stock exchanges, BSE and NSE also hit their weekly highs riding on this monetary policy boost. This was Shri. Patel’s first policy decision as the new RBI commander in-chief, though not the first major decision in the RBI as he was the face behind RBI moving onto a CPI-based inflation index.

If you take a closer look at the minutes of the six-member MPC (3 from RBI, 3 appointed by the Government.) you would find a common paradigm. The last bi-monthly monetary policy meeting chaired by Former Governor and now Professor at University of Chicago Shri. RaghuramRajan. also talked about how the banks are expected to do better in transmitting these rate cuts to the public to boost credit growth. Credit growth is crucial for expansion of the Indian Economy in market size and capacity utilization rates (close to mid-70s in percentage terms), a healthy capacity utilization is gauged when it is upwards of 85%.

Dissecting down elements part by part, word by word you are guaranteed to discover and interpret things in a more subtle and precise way. If we do that here with the common paradigm then you would be able to make out the direct reference is being made to ‘public sector banks’ (PSBs) accounting ‘slightly’ over three-fourths of the Indian banking scenario to reduce their individual rates and help the Indian economy out of its shackles to grow at a par of 8% (it’s highest during 2004-11.), a prime goal for PM Modi to harness India’s demographic dividend.

However, this is said easier than done when you also account for 88% of the Gross Non-Profitable Assets in the banking sector. Managers and officials are worried about their ‘positions’ for sanctioning loans and this sentiment is making the ‘core discipline’ (deposits plus lending) of the already arbitrary functioning of PSBs. A current reference to a similar case was the ‘money laundering’ accusation against IDBI Bank officials for approving a loan to the ‘absconding’ Kingfisher-heir and owner Vijay Mallya. The officials were cleared off for the violation of Prevention of Money Laundering Act, 2002.

Capitalism versus Governmental Intervention

The economic concept of ‘trickle-down economics’ lay out a marker which says the more and more benefits accrued by the population at the top decile of income & wealth would lead to more complementary investment which will lead to employment creation. Employment creation would expand the size of the market and henceforth would lead to more investment by the capitalists or the well-off for meeting this expanded size of market. Eventually, without any intervention of the government the economy would be a win-win situation for the white collars and the blue collars.The concept of trickle-down economics is as capitalist you can get.

However, in the delinquency of ‘classical-cum-neo-classical’ reality has led-us to two major Depressions for the World economy (1930s and 2008), two major wars – one a World War and now a modern one against Inequality (do relate I for Inequality to I for ISIS.).

The Way Out

However, our motherland hasn’t been much affected along with our ‘non-pareil’ neighbours and counterpart the People’s Republic of China. This is due to the mixed economy ratio of governance which allows the Government to ‘hawk-in’ when it sees any mala fide intent in the corporate world. The tool used by the Government to perform is Regulation exactly why SEBI or Securities and Exchanges Board of India was setup in 1992 through the SEBI Act, 1992 after the Harshad Mehta Scam.

This ‘regulation’ garb can also bite you back as observed by the current scare-mongering sentiment with the bank officials. But it would not lead you to the ‘upheaval’ which the bottom decile faced after the US Government ‘unfairly’ bandaged the patient afflicted with an acute disease by ignoring the patient diagnosed chronically. However, the ‘bail-out’ deserves a much more anointed piece than this.

India’s major formal workforce out of 370 million people are employed in the MSMEs (less than 10 workers.). This situation has also risen due to the fractious labyrinth regulations and benefits which incentivises the companies to ‘not expand, these workhorses are facing a negative credit binge. One such sector is the ITES where 4,000 CRISIL-rated MSMEs have conjured up a growth of 12% year-on-year compared to their bigger counterparts in the Services sector which have clocked on an average 20% growth year-on-year.

The credit out take has risen by 9%-10% due to the well-functioned and efficient private sector banks. The bad debt issue with the banks are believed to be seeing light at the end of the tunnel after RBI’s ‘Asset Quality Review’. Now, the buck has passed on to the Bank Boards Bureau to reform the functioning of these banks.

Another option is of making a separate Bad Bank or an Asset Reconstructing Company (ARC) which will be dealt with in the next issue of this blog next week. Till then…Tschus!

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