Liquidity crisis facing the country is acute and government has taken one after other measures in the last two months to dilute the adverse effects of this liquidity crisis on the overall economy. I no doubt praise the sincere steps taken by Mr. P Chidambram Finance Minister and governor RBI to counter the financial attack caused by foreign based financial terrorists like Lehman Brothers ( not much different from Bin Laden , the renowned terrorist).
However It is astonishing that even after relentless efforts the problem of liquidity is not fully resolved (though RBI has been saying at the same time that banks have surplus fund and it is a fact too that banks are depositing their daily surplus with RBI despite low interest return).
It is to be understood why banks are hesitant to disburse credit to real estate sector or other SME or MSE sector inspite of easing liquidity.
It is to be assessed why businessmen are asking for bailout package when there is not much fall in sale and overall demand.
Government has to understand why there is normal tendency of borrowers not to repay the loan and advances availed by them from banks.
Government has to understand whether only cut in interest rate will stimulate the economy.
Is it not possible that too much cut in interest rate may cause disincentive to those who save and add to the problem of those old men whose livelihood depend on interest income.
Government must distinguish the liquidity crisis faced by individuals, banks, businessman, and the government itself from different angle of consideration.
I like to submit my views in brief which is though not exhaustive but point out some of the facts which may eventually lead to expose the real nature of liquidity crisis and enlighten the pros and cons of the matter.
Liquidity of Bank depends mainly on following three points: -----
1. Increase on deposits: As earning of people increases or expenses decreases, people deposit the same surplus in Banks or invest in other assets like home, vehicle etc., liquidity of bank will increase as much as people will deposit their surplus of income/profits in bank.
2. Loans and Advances made by banks: As credit by banks increases, the scope of trade or manufacturing or extending of services which in turn increases scope of creation of capital in the form of income. Liquidity of bank increases or decreases as advances of bank decreases or increases.
3. Repayment received from existing borrowers: When banks give loan to any person or institution, they expect the same is repaid by borrower in periodical installment or in case of working capital at least sale is deposited in bank. As such when all borrowers repays the banks loan regularly as per EMI (equated monthly installment) fixed by banks, banks are able to manage their Asset and Liability (called as ALM) gainfully without disturbing the liquidity. But when repayments are less than what are expected, banks face the problem of liquidity.
4. External factors like global slowdown causing huge withdrawal by FII or faulty policies of the government or weakness of the regulating and administrative systems and procedures or dilution in public trust on a particular bank causing panic in depositors and hence unwarranted withdrawal or large scale fraudulent affairs going on in any bank and so on ……
If we look at above four points seriously and ponder over the same we understand that liquidity is adversely affected by mainly
a. When deposit does not increase i.e. when income of people goes down or people start spending more than what they earn. Liquidity of Individuals or businessman when dries or shrinks, they contribute the same crisis to banks and financial institutions.
b. When banks extend loan and advances more than what they are capacitated to.
It is worthwhile to mention here that out of deposits received by bank, 24% of the same is deposited with government of India as SLR and 5% as CRR and at least 1% is used for infrastructure and establishment cost of the bank. Obviously maximum Credit deposit ratio may be allowed to be 70% (in the olden days CD ratio used to be less than 60%).
If any bank lends under pressure of the government more than 70% of available deposits it mobilizes, problem of liquidity is supposed to arise.
Also when banks writes off loan or sacrifices their money to bad borrowers either willfully or under instruction from the government more than the level of their absorbing capacity, banks face the problem of liquidity.
c. When people who have taken loan and advances from the bank do not repay the installment in time or when working capital financed by banks is either consumed by borrower or do not create turnover in bank. In common terminology, such type of loan is categorized as Non Performing Asset (NPA). As such when real NPA (not only what bank declare but also what banks hide) increases, liquidity problem in banks increases.
d. When bank is victim of mischievous and fraudulent employees or wrongful policies of the government and undue political interference in the banking system or incapability of recovery mechanism to recover the money from bad borrowers.
Here I would like to say that main reasons of liquidity crisis in banks may be as follows:
1. People’s expenses have increased far more than their increases in income. As such rate of savings has gone down.
2. Bank’s lending has increased more than their capacity. To make it more clear banks CD ratio has gone above 70% in many cases which forces banks either to offer higher rates on interest on deposits they acquire from the market or to borrow fund from RBI. Also banks deposit is not growing in the desired ratio due to sharp fall in earning of people and sharp increase in their spending.
3. Borrowers are not repaying the loan wither willfully or due to sickness in their business or due to higher spending. In other words real NPA of banks have increased abnormally due to vote bank politics prevailing in the country, the problem of liquidity in banks has aggravated.
4. Banks are unable to recover the bad loans from defaulters due to inefficient system and forced to write off large amount of bad loans or sacrifice large amount in compromising with large defaulters.
5. Large withdrawal of fund from depositors due to erosion in trust on the bank. When bank’s image is tarnished or bank is likely to fail due to internal irregularities , depositors are tempted to withdraw money from the bank even if they do not need and in this way they cause the shrinking of liquidity in banks or one can say they add fuel to fire.
I am of strong view that the present problem of liquidity is more due to faults in policies adopted by our government during last two decades of unregulated reformation, privatization and globalization and weaknesses of the system which may be poitical, social, judicial or administrative. It means that or system and procedure were not strengthened and empowered adequately to deal with the situation likely to arise in free economy. Our environment, infrastructure and our people are not as advanced, cultured and disciplined as it is in other developed countries which whom Indian economy intends to compete.
Obviously it will not be absolutely correct if we say that “Withdrawal by FII (Foreign Institutional Investors)” or “Global Financial Crisis caused by subprime mortgages” is the main reason behind liquidity crisis faced by the Indian banks.
Of course global crisis has added new dimension to crisis forcing government to reduce repo rate (6.5%), reverse repo rate (5%), CRR (5%) and SLR (24%) to historic low level and also to announce many other bailout packages for industries in line with the trend set by other developed countries of the world.
As such the global crisis has undoubtedly added fuel to already existing fire in the banks, but definitely is not the main and absolute reason of the crisis as claimed by our political leaders and as endorsed by sycophant economists.
If we do not assess the internal weakness of the banking and continue to claim that our banks are strong and harp on our achievements based on the fabricated and concocted figures, our banks will very soon lend in more severe trouble zone when most of the banks will be on the verge of bankruptcy as is presently happening in USA and other countries.
We must at least try to learn lessons from the failure of unimaginable big banks like Citi group and Lehman Brothers, in other countries to ensure real safety of our Indian banks and we must bring about desired improvement in the Indian banking system.
We must look deep into the balance sheet of different Indian Banks to understand the liquidity problem of individual banks and then try to diagnose. It will be prove to be harmful if government or RBI provides the same relaxation to all banks. This happens in the same way as liquidity problem happens in case of individual and which differs from person to person. Similarly liquidity problem of India differs from that of USA, Japan and other courties.
In our country if tax collection is less compared to government’s normal spending, our country will face liquidity problem. If our government uses the inflow of revenue in distributing charity and payment of interest on borrowings in greater numbers, government has to face liquidity problem.
As such need of the hour is true introspection of the system and rejuvenate the ailing system in time and not to blame entirely external factors for the prevailing liquidity crisis. Same medicine cannot be prescribed to all when the sickness of different individuals is different.
But as of now government appears to have injected same medicine in the blood of all ailing banks. Similarly government is trying to solve the problem of industrialists and traders by forcing banks to bring about reduction in lending rates.
Perhaps government is playing with fire only in view of forthcoming election and inclined to postpone taking harsh steps for the next government .Lest it should become too late to control the fire.
Danendra Jain,
8th December 2008
Monday, December 8, 2008
Reality of liquidity Crisis
Liquidity crisis facing the country is acute and government has taken one after other measures in the last two months to dilute the adverse effects of this liquidity crisis on the overall economy. I no doubt praise the sincere steps taken by Mr. P Chidambram Finance Minister and governor RBI to counter the financial attack caused by foreign based financial terrorists like Lehman Brothers ( not much different from Bin Laden , the renowned terrorist).
However It is astonishing that even after relentless efforts the problem of liquidity is not fully resolved (though RBI has been saying at the same time that banks have surplus fund and it is a fact too that banks are depositing their daily surplus with RBI despite low interest return).
It is to be understood why banks are hesitant to disburse credit to real estate sector or other SME or MSE sector inspite of easing liquidity.
It is to be assessed why businessmen are asking for bailout package when there is not much fall in sale and overall demand.
Government has to understand why there is normal tendency of borrowers not to repay the loan and advances availed by them from banks.
Government has to understand whether only cut in interest rate will stimulate the economy.
Is it not possible that too much cut in interest rate may cause disincentive to those who save and add to the problem of those old men whose livelihood depend on interest income.
Government must distinguish the liquidity crisis faced by individuals, banks, businessman, and the government itself from different angle of consideration.
I like to submit my views in brief which is though not exhaustive but point out some of the facts which may eventually lead to expose the real nature of liquidity crisis and enlighten the pros and cons of the matter.
Liquidity of Bank depends mainly on following three points: -----
1. Increase on deposits: As earning of people increases or expenses decreases, people deposit the same surplus in Banks or invest in other assets like home, vehicle etc., liquidity of bank will increase as much as people will deposit their surplus of income/profits in bank.
2. Loans and Advances made by banks: As credit by banks increases, the scope of trade or manufacturing or extending of services which in turn increases scope of creation of capital in the form of income. Liquidity of bank increases or decreases as advances of bank decreases or increases.
3. Repayment received from existing borrowers: When banks give loan to any person or institution, they expect the same is repaid by borrower in periodical installment or in case of working capital at least sale is deposited in bank. As such when all borrowers repays the banks loan regularly as per EMI (equated monthly installment) fixed by banks, banks are able to manage their Asset and Liability (called as ALM) gainfully without disturbing the liquidity. But when repayments are less than what are expected, banks face the problem of liquidity.
4. External factors like global slowdown causing huge withdrawal by FII or faulty policies of the government or weakness of the regulating and administrative systems and procedures or dilution in public trust on a particular bank causing panic in depositors and hence unwarranted withdrawal or large scale fraudulent affairs going on in any bank and so on ……
If we look at above four points seriously and ponder over the same we understand that liquidity is adversely affected by mainly
a. When deposit does not increase i.e. when income of people goes down or people start spending more than what they earn. Liquidity of Individuals or businessman when dries or shrinks, they contribute the same crisis to banks and financial institutions.
b. When banks extend loan and advances more than what they are capacitated to.
It is worthwhile to mention here that out of deposits received by bank, 24% of the same is deposited with government of India as SLR and 5% as CRR and at least 1% is used for infrastructure and establishment cost of the bank. Obviously maximum Credit deposit ratio may be allowed to be 70% (in the olden days CD ratio used to be less than 60%).
If any bank lends under pressure of the government more than 70% of available deposits it mobilizes, problem of liquidity is supposed to arise.
Also when banks writes off loan or sacrifices their money to bad borrowers either willfully or under instruction from the government more than the level of their absorbing capacity, banks face the problem of liquidity.
c. When people who have taken loan and advances from the bank do not repay the installment in time or when working capital financed by banks is either consumed by borrower or do not create turnover in bank. In common terminology, such type of loan is categorized as Non Performing Asset (NPA). As such when real NPA (not only what bank declare but also what banks hide) increases, liquidity problem in banks increases.
d. When bank is victim of mischievous and fraudulent employees or wrongful policies of the government and undue political interference in the banking system or incapability of recovery mechanism to recover the money from bad borrowers.
Here I would like to say that main reasons of liquidity crisis in banks may be as follows:
1. People’s expenses have increased far more than their increases in income. As such rate of savings has gone down.
2. Bank’s lending has increased more than their capacity. To make it more clear banks CD ratio has gone above 70% in many cases which forces banks either to offer higher rates on interest on deposits they acquire from the market or to borrow fund from RBI. Also banks deposit is not growing in the desired ratio due to sharp fall in earning of people and sharp increase in their spending.
3. Borrowers are not repaying the loan wither willfully or due to sickness in their business or due to higher spending. In other words real NPA of banks have increased abnormally due to vote bank politics prevailing in the country, the problem of liquidity in banks has aggravated.
4. Banks are unable to recover the bad loans from defaulters due to inefficient system and forced to write off large amount of bad loans or sacrifice large amount in compromising with large defaulters.
5. Large withdrawal of fund from depositors due to erosion in trust on the bank. When bank’s image is tarnished or bank is likely to fail due to internal irregularities , depositors are tempted to withdraw money from the bank even if they do not need and in this way they cause the shrinking of liquidity in banks or one can say they add fuel to fire.
I am of strong view that the present problem of liquidity is more due to faults in policies adopted by our government during last two decades of unregulated reformation, privatization and globalization and weaknesses of the system which may be poitical, social, judicial or administrative. It means that or system and procedure were not strengthened and empowered adequately to deal with the situation likely to arise in free economy. Our environment, infrastructure and our people are not as advanced, cultured and disciplined as it is in other developed countries which whom Indian economy intends to compete.
Obviously it will not be absolutely correct if we say that “Withdrawal by FII (Foreign Institutional Investors)” or “Global Financial Crisis caused by subprime mortgages” is the main reason behind liquidity crisis faced by the Indian banks.
Of course global crisis has added new dimension to crisis forcing government to reduce repo rate (6.5%), reverse repo rate (5%), CRR (5%) and SLR (24%) to historic low level and also to announce many other bailout packages for industries in line with the trend set by other developed countries of the world.
As such the global crisis has undoubtedly added fuel to already existing fire in the banks, but definitely is not the main and absolute reason of the crisis as claimed by our political leaders and as endorsed by sycophant economists.
If we do not assess the internal weakness of the banking and continue to claim that our banks are strong and harp on our achievements based on the fabricated and concocted figures, our banks will very soon lend in more severe trouble zone when most of the banks will be on the verge of bankruptcy as is presently happening in USA and other countries.
We must at least try to learn lessons from the failure of unimaginable big banks like Citi group and Lehman Brothers, in other countries to ensure real safety of our Indian banks and we must bring about desired improvement in the Indian banking system.
We must look deep into the balance sheet of different Indian Banks to understand the liquidity problem of individual banks and then try to diagnose. It will be prove to be harmful if government or RBI provides the same relaxation to all banks. This happens in the same way as liquidity problem happens in case of individual and which differs from person to person. Similarly liquidity problem of India differs from that of USA, Japan and other courties.
In our country if tax collection is less compared to government’s normal spending, our country will face liquidity problem. If our government uses the inflow of revenue in distributing charity and payment of interest on borrowings in greater numbers, government has to face liquidity problem.
As such need of the hour is true introspection of the system and rejuvenate the ailing system in time and not to blame entirely external factors for the prevailing liquidity crisis. Same medicine cannot be prescribed to all when the sickness of different individuals is different.
But as of now government appears to have injected same medicine in the blood of all ailing banks. Similarly government is trying to solve the problem of industrialists and traders by forcing banks to bring about reduction in lending rates.
Perhaps government is playing with fire only in view of forthcoming election and inclined to postpone taking harsh steps for the next government .Lest it should become too late to control the fire.
Danendra Jain,
However It is astonishing that even after relentless efforts the problem of liquidity is not fully resolved (though RBI has been saying at the same time that banks have surplus fund and it is a fact too that banks are depositing their daily surplus with RBI despite low interest return).
It is to be understood why banks are hesitant to disburse credit to real estate sector or other SME or MSE sector inspite of easing liquidity.
It is to be assessed why businessmen are asking for bailout package when there is not much fall in sale and overall demand.
Government has to understand why there is normal tendency of borrowers not to repay the loan and advances availed by them from banks.
Government has to understand whether only cut in interest rate will stimulate the economy.
Is it not possible that too much cut in interest rate may cause disincentive to those who save and add to the problem of those old men whose livelihood depend on interest income.
Government must distinguish the liquidity crisis faced by individuals, banks, businessman, and the government itself from different angle of consideration.
I like to submit my views in brief which is though not exhaustive but point out some of the facts which may eventually lead to expose the real nature of liquidity crisis and enlighten the pros and cons of the matter.
Liquidity of Bank depends mainly on following three points: -----
1. Increase on deposits: As earning of people increases or expenses decreases, people deposit the same surplus in Banks or invest in other assets like home, vehicle etc., liquidity of bank will increase as much as people will deposit their surplus of income/profits in bank.
2. Loans and Advances made by banks: As credit by banks increases, the scope of trade or manufacturing or extending of services which in turn increases scope of creation of capital in the form of income. Liquidity of bank increases or decreases as advances of bank decreases or increases.
3. Repayment received from existing borrowers: When banks give loan to any person or institution, they expect the same is repaid by borrower in periodical installment or in case of working capital at least sale is deposited in bank. As such when all borrowers repays the banks loan regularly as per EMI (equated monthly installment) fixed by banks, banks are able to manage their Asset and Liability (called as ALM) gainfully without disturbing the liquidity. But when repayments are less than what are expected, banks face the problem of liquidity.
4. External factors like global slowdown causing huge withdrawal by FII or faulty policies of the government or weakness of the regulating and administrative systems and procedures or dilution in public trust on a particular bank causing panic in depositors and hence unwarranted withdrawal or large scale fraudulent affairs going on in any bank and so on ……
If we look at above four points seriously and ponder over the same we understand that liquidity is adversely affected by mainly
a. When deposit does not increase i.e. when income of people goes down or people start spending more than what they earn. Liquidity of Individuals or businessman when dries or shrinks, they contribute the same crisis to banks and financial institutions.
b. When banks extend loan and advances more than what they are capacitated to.
It is worthwhile to mention here that out of deposits received by bank, 24% of the same is deposited with government of India as SLR and 5% as CRR and at least 1% is used for infrastructure and establishment cost of the bank. Obviously maximum Credit deposit ratio may be allowed to be 70% (in the olden days CD ratio used to be less than 60%).
If any bank lends under pressure of the government more than 70% of available deposits it mobilizes, problem of liquidity is supposed to arise.
Also when banks writes off loan or sacrifices their money to bad borrowers either willfully or under instruction from the government more than the level of their absorbing capacity, banks face the problem of liquidity.
c. When people who have taken loan and advances from the bank do not repay the installment in time or when working capital financed by banks is either consumed by borrower or do not create turnover in bank. In common terminology, such type of loan is categorized as Non Performing Asset (NPA). As such when real NPA (not only what bank declare but also what banks hide) increases, liquidity problem in banks increases.
d. When bank is victim of mischievous and fraudulent employees or wrongful policies of the government and undue political interference in the banking system or incapability of recovery mechanism to recover the money from bad borrowers.
Here I would like to say that main reasons of liquidity crisis in banks may be as follows:
1. People’s expenses have increased far more than their increases in income. As such rate of savings has gone down.
2. Bank’s lending has increased more than their capacity. To make it more clear banks CD ratio has gone above 70% in many cases which forces banks either to offer higher rates on interest on deposits they acquire from the market or to borrow fund from RBI. Also banks deposit is not growing in the desired ratio due to sharp fall in earning of people and sharp increase in their spending.
3. Borrowers are not repaying the loan wither willfully or due to sickness in their business or due to higher spending. In other words real NPA of banks have increased abnormally due to vote bank politics prevailing in the country, the problem of liquidity in banks has aggravated.
4. Banks are unable to recover the bad loans from defaulters due to inefficient system and forced to write off large amount of bad loans or sacrifice large amount in compromising with large defaulters.
5. Large withdrawal of fund from depositors due to erosion in trust on the bank. When bank’s image is tarnished or bank is likely to fail due to internal irregularities , depositors are tempted to withdraw money from the bank even if they do not need and in this way they cause the shrinking of liquidity in banks or one can say they add fuel to fire.
I am of strong view that the present problem of liquidity is more due to faults in policies adopted by our government during last two decades of unregulated reformation, privatization and globalization and weaknesses of the system which may be poitical, social, judicial or administrative. It means that or system and procedure were not strengthened and empowered adequately to deal with the situation likely to arise in free economy. Our environment, infrastructure and our people are not as advanced, cultured and disciplined as it is in other developed countries which whom Indian economy intends to compete.
Obviously it will not be absolutely correct if we say that “Withdrawal by FII (Foreign Institutional Investors)” or “Global Financial Crisis caused by subprime mortgages” is the main reason behind liquidity crisis faced by the Indian banks.
Of course global crisis has added new dimension to crisis forcing government to reduce repo rate (6.5%), reverse repo rate (5%), CRR (5%) and SLR (24%) to historic low level and also to announce many other bailout packages for industries in line with the trend set by other developed countries of the world.
As such the global crisis has undoubtedly added fuel to already existing fire in the banks, but definitely is not the main and absolute reason of the crisis as claimed by our political leaders and as endorsed by sycophant economists.
If we do not assess the internal weakness of the banking and continue to claim that our banks are strong and harp on our achievements based on the fabricated and concocted figures, our banks will very soon lend in more severe trouble zone when most of the banks will be on the verge of bankruptcy as is presently happening in USA and other countries.
We must at least try to learn lessons from the failure of unimaginable big banks like Citi group and Lehman Brothers, in other countries to ensure real safety of our Indian banks and we must bring about desired improvement in the Indian banking system.
We must look deep into the balance sheet of different Indian Banks to understand the liquidity problem of individual banks and then try to diagnose. It will be prove to be harmful if government or RBI provides the same relaxation to all banks. This happens in the same way as liquidity problem happens in case of individual and which differs from person to person. Similarly liquidity problem of India differs from that of USA, Japan and other courties.
In our country if tax collection is less compared to government’s normal spending, our country will face liquidity problem. If our government uses the inflow of revenue in distributing charity and payment of interest on borrowings in greater numbers, government has to face liquidity problem.
As such need of the hour is true introspection of the system and rejuvenate the ailing system in time and not to blame entirely external factors for the prevailing liquidity crisis. Same medicine cannot be prescribed to all when the sickness of different individuals is different.
But as of now government appears to have injected same medicine in the blood of all ailing banks. Similarly government is trying to solve the problem of industrialists and traders by forcing banks to bring about reduction in lending rates.
Perhaps government is playing with fire only in view of forthcoming election and inclined to postpone taking harsh steps for the next government .Lest it should become too late to control the fire.
Danendra Jain,
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