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Why Government is afraid of Withdrawing Stimulus Package?
Why the government of India and RBI is not in a
position to withdraw stimulus packages it announced during last year after
economic crisis erupted in USA?
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 or import 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 foreign-based
importers blocked their export proceeds, 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 mis-utilised this policy
of RBI and restructured large amount of
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.
Thirdly Government of India and various state
governments have parked in savings or Current accounts in various PSU and
private banks contingency fund and development
fund worth five lac crores of rupees. If state government and central
government demand interest for the same, I think it will cause irreparable
damage to profitability of banks.
Fourthly banks have discarded thousands of crores of rupees accepted as bulk
deposits from cash rich PSUs and other corporate which they had mobilized at
higher interest rate as high as 12 and 13% last year to meet the then
prevailing credit crunch or you say to meet liquidity crisis caused not due
to US crisis but due to reckless financing made by banks in realty sector in
unison with the then prevailing policy of the government.
It is obvious that if RBI did not extend above-mentioned stimulus packages,
banks in general could slip to red zone, not due to the effects of global
economic crisis but due to hidden malady. The
greatest beneficiary of such stimulus packages are private banks who have
been awarded with interest free fund by state or central government in CASA.
If private banks earn profit due to such awards
they need not pay dividend to government of India whereas PSU banks are
supposed to share profit with the government in proportion to their share in
capital.
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 are the erosion in
interest income of pensioners and other self-employed erosion whose survival
depends on interest income to a great extent.
I have decided to submit my this letter to you to prove that due to wrong
policies of the government PSU banks in general suffer and private banks
gain in disguise. As a consequence PSU banks are rate poor in comparison to
private banks and ultimately it is employees of PSU banks who suffer in wage
revision which is pending since November 2007 for none of their faults.
Whatever may be the constraints, irregularities and inherent weaknesses of
PSU banks, such banks earn profit in at least books of account whereas
central government department and PSUs get higher salary even if they do
nothing or book losses.
Danendra Jain
4th November 2009
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