Stimulus trauma

As far as I know government has provided liquidity of Rs.4.00 lacs crores to banking system after September 2008 by reducing CRR by 4.75% . After the collapse of Lehman Brothers and many prominent financial institutions including big banks in USA, Indian government also could sense the fear of global meltdown and recession and announced various stimulus packages in line with what Mr. Obama announced for USA to meet the economic crisis he faced.

Here it is worthwhile to mention that economic condition of US people and their standard of living is not at all comparable with that of India. Our banks do not extend credit as US banks were extending before eruption of crisis last year. The banks in US were facing sub prime crisis which Indian banks do not face at all. And this is why many economists predicted that Indian economy will not be affected by the crisis US government could face after giant bank like City Bank, biggest insurance company like AIG and financial institutes like Lehman Brothers started falling .

It is however true that liquidity crisis in US was grave at that time and the stimulus package announced by Obama government was necessary to save their economy. Due to such crisis in USA, other nations including India could be affected in trade related to export and import with US. As such industries in India involved in export directly or indirectly could be the victim of US economic crisis. Growth contribution done by such industries could play some role in overall GDP growth. But these industries did not need additional finance. Rather these industries could not utilize even the sanctioned credit in want of export orders. In case their export proceeds were blocked by foreign based importers, the problem of liquidity could arise for such export oriented industries. And they needed stimulus package indeed.

But our government was generous and cautious enough to announce various tax cut and reduction in CRR, repo rate and SLR. Banks could get back as much as four lac crore rupees from RBI which they had earlier parked with RBI as per then prevailing CRR rate. As a result banks could get not only surplus liquidity but also could earn additional interest of at least Rs.40000/- crores during the period Sept 08 to September 09.Had it not been so I presume banks could not have shown growth in profit , rather they could come in losses due to already existing inherent weakness .The greatest weakness of Banking in India is that there is not proper repayment of loan which they disburse due to weak judiciary , weak administration and dirty policy of the government in fear of erosion of vote bank.

Secondly banks were allowed to restructure their credit to such industries which were likely to be affected by global economic crisis. Banks in general misutilised this policy of RBI and restructured almost all hidden bad loans (which were although Non performing assets called as Sub standard assets but shown as Standard assets in their books of accounts so that they could portray attractive picture in their financial statements). As far as I know bank altogether restructured loan of value as much as two lac crores and more. In this way they could book interest income on such loans which were otherwise not eligible for booking interest as per prudential norms set by RBI for classification of assets and income recognition.
It is obvious that if above mentioned stimulus packages were not extended by RBI, banks in general could slip to red zone, not due to the effects of global economic crisis but due to hidden malady.

This is why our government is not in a position to withdraw the stimulus package inspite of the fact that there is visible recovery from the effects of so called crisis erupted in the last year. As a matter of fact most of the industries have booked considerable good growth in their annual and quarterly result. Another bitter truth is that banks are not able to extend credit as much as it is required from them by government of India and in proportion to liquidity they got from RBI as medicine to cure the sickness which was visualized to creep into the banking system after eruption of crisis in USA. This is proved by the fact that banks in general are parking their surplus liquidity with RBI at Reverse Repo Rate i.e. as low as 3%. Another bad consequence of surplus liquidity with banks is that they have reduced interest rate on deposit from 11% last year to 5 to 6% this year. The most painful effects of such sharp fall in deposit rate is the erosion in interest income of pensioners and other self employed erosion whose survival depends on interest income to a great extent.