The Funds Crunch
FROM THE EDITORT A DINNER that she hosted for financial journalists, post the
presentation of Union Budget, Finance Minister Nirmala Sitharaman
explained one of the reasons behind the government’s decision to issue
foreign currency debt. Given the tight liquidity in the market, she
pointed out, if the government did all its borrowing from the domestic
market, it would leave little money for the private sector to borrow. At
the same dinner, a senior finance ministry official held forth on the number
of initiatives being taken by the government to bring in a flood of liquidity to
the domestic debt markets.
A week before the finance minister’s dinner, Niranjan Hiranandani,
Co-founder and Managing Director of Hiranandani Group, the real estate
giant headquartered in Mumbai, was expounding on the liquidity issues
in the course of a conversation. Hiranandani, apart from running his own
business, wears two other hats – he is the senior vice president of Assocham
and also president of the National Real Estate Development Council. Private
investment would not pick up, simply because of the credit crunch, says
Hiranandani. Too many companies were finding it difficult to borrow at
reasonable rates, or even at all. “You might own a big car and someone else
might be driving a smaller car. But if there is no petrol available, both of you
will be stuck on the road,” was the analogy he used.
The credit crisis is bothering economists, bankers, businessmen, ministers
and bureaucrats alike. The real estate sector and the small and medium
enterprises that depend on non-banking financial companies for their funding
needs were hit, because the shadow banks were finding it difficult to access
cash from their usual lenders – banks and mutual funds.
The public sector banks (PSBs) with weak balance sheets had been told
by the Reserve Bank of India to stop lending until their capital problems were
sorted out. Meanwhile, PSBs that had money to lend were mostly taking care
of the funding needs of the government and the other public sector enterprises,
leaving little for the private sector.
Private banks with funds had turned cautious post the string of non-
performing assets that had landed at NCLT under the Bankruptcy Act. They
were only giving money to the very best of companies. The NBFCs and HFCs,
which often used to borrow from banks and mutual funds to lend to players
that banks did not want an exposure to, were finding it difficult to access
funds as well. The IL&FS default had scared the banks and mutual funds, and
suddenly the other NBFCs found the money tap turned off. One of the biggest
housing finance companies – Dewan Housing – was now on the verge of
collapse. Bankers themselves complained that a lower household savings rate
was affecting their own ability to raise cheap funds.
It had become a vicious cycle. The credit crunch was causing even good
businesses to turn sour. In turn, each default by companies was making money
scarce for the remaining players – in turn putting them in trouble as well.
How can this be sorted out? Our cover story by Executive Editor Anand
Adhikari (page 28) looks at the full extent of the problem and also what the
government can do.A
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