Tuesday, January 06, 2009

India Credit Squeeze: The end is not in sight yet

Even as the RBI is trying to pump in liquidity in the system there seems to be no visible impact at the corporate level. The interest rates that were charged for project financing (read long term) loan s have still not come down. If it was around 12-14% for large corporate houses, the rate is still the same, how it is split has marginally changed. (Syndication/arrangement fees, upfront fees, commission etc). Do banks still fear that they would have to face a capital call? Not anymore.

What they are really worried is about the ability of the Indian corporate to pay back the loan, because quite frankly the demand has disappeared. We seem to be hurtling towards a deflationary environment with almost no end in sight. We should take a look at what the local media is saying, has the willingness to spend disappeared across social/geographical strata or is it a purely urban phenomena. Deflation is the worst case scenario for any banker/policy maker, because your conventional tools fail as a means of spurring demand.

But still, the underlying story for India is slightly different. If we have a bumper agricultural crop this year, there will be spending. Might not be large ticket urban spending, but there will be incremental spending across large part of our population - this demand has not increased because of credit (in fact the availability of micro credit has possibly done a wealth of good for this segment of the population, but then that is another story), it appears only when there is surplus form what is required for the next agricultural season. I think we should start praying to the gods.

Till then, for all that RBI tries bankers are not going to lend, already their books would be 'infested' with NPA s, I doubt anybody would have the guts to venture out further, "where no banker has gone before types " ahem. A friend says that treasury profits have zoomed in this volatile environment, expect the private banks to cash in on this big time. If you cant produce, you can atleast trade.

Deflation, Deflation Deflation it reads as of now. Hopefully it will turn soon.

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