lakh crore. But the actual currency in circulation by
March 2019 stood at 21.36 lakh crore, showing a likely deficit of1.45 lakh crore.
“It seems that the economy hasn’t been able to ad-
just to lower cash levels as was assumed,” says Chari of
Quantum. At present, system level liquidity has been
back in surplus mode in the last two months, but will
it stay there for long?
LESSONS FOR POLICY MAKERS
The steps taken by the government and the RBI to
infuse liquidity would surely help. Rajkiran
Rai, Managing Director of Union Bank of In-
dia, terms the pooled assets Budget proposal
as a good confidence building exercise. “NBFCs
need a boost as they play a crucial role in finan-
cial intermediation in the economy,” says Rai.
Many experts suggest that the need is to repair
the NBFC engine and bring back confidence in
money markets. Sanjiv Bajaj, Managing Director
and CEO of Bajaj Finserv, recently said that the
top 10 NBFCs have assets in excess of `50,000
crore each. “They are responsible for over 25 per
cent of the incremental credit that is driving our
economy over the last five years,” he said.
Finance Industry Development Council, a
representative body of NBFCs, has been asking
the government and the regulator for a dedicated
liquidity window through the banking channels.
Raman Agarwal, Chairman, FIDC, had recently
said, “We need a permanent liquidity window for
NBFCs on the line of the National Housing Bank.”
The real estate industry is expecting the loan
repayment schedule to be extended. “The government
can also start accepting housing inventory in place of
the various charges levied to ease the pressure on the
real estate industry,” suggests Mehta of Paradigm Realty.
Uday Kotak, Managing Director and CEO of Kotak
Mahindra Bank, put the liquidity issue in perspective by
linking it with the “price of liquidity”. The cost of liquid-
ity or funding has gone up substantially, which would
impact the business models of NBFCs.
There is also an issue of financial stability. Solvency
contagion losses to the banking system due to idiosyn-
cratic NBFC or HFC failure show that the failure of
largest of these can cause losses comparable to those
caused by the big banks, states the RBI Financial Sta-
bility Report.
The economy and the financial system are two sides
of the same coin. Ben Bernanke, former Chair of the US
Federal Reserve, has a lesson for policy makers in his
book, Firefighting: The Financial Crisis And Its Les-
sons, which he has co-authored with two other key pol-
icy makers of that time. He suggests that even aggres-
sive measures to stabilise the financial system cannot
succeed if the economy is imploding, while aggressive
measures to revive the economy cannot succeed if the fi-
nancial system is collapsing. “Crisis fighting and macro-
economic policies have to work together, and a govern-
ment’s ability to limit the intensity of a financial crisis
depends on its macroeconomic room for manoeuvre,”
advises Bernanke. It’s time to act now on both fronts.
Inputs from Dipak Mondal
and Sumant Banerji@anandadhikariCOVER STORY> LIQUIDITY40 IBUSINESS TODAYIAugust 11 I 2019HOUSEHOLD SAVINGS
Financial savings are
down (as % of GDP)
Mar-12 Mar-18051015202530354030.5017.2010.90Source: RBIGross Domestic Savings
Household Savings
Gross Financial Savings“Banks are considering only small-
value proposals up to `1 crore.
Focus is more on micro loans...
SMEs have been left out”
CHANDRAKANT SALUNKHE
Founder and President, SME Chamber of India