Sunday, October 12, 2008

>India readies big bailout measures

NEW DELHI: With liquidity becoming the immediate priority of the government, it is looking at a slew of measures to make more funds available to t
he credit market and there are strong indications that banks may be nudged to lend to companies with a good credit rating.

Official sources told TOI that a further cut in the cash reserve ratio (CRR), a reduction in interest rates and a 'ban' on reverse repo are some of the options being looked at to augment liquidity, while a ban on short selling is also being considered as a way of curbing the markets' bearish sentiments.

A proposal to dilute mark-to-market norms for banks is also being considered. Such a step, which has already been taken in the US, essentially allows banks to pretend that their assets have the same value at which they were bought rather than the current market value. Thus, they are able to avoid providing for any losses that would accrue if they valued them at current levels.

In addition to these measures, banks might be informally told that they should lend to companies with AAA ratings. This, because it would serve little purpose to restore liquidity to banks if they continued to remain wary of lending.

In the aftermath of the global financial meltdown, banks and financial institutions have turned ultra-conservative in lending. "What purpose would it serve if the banks remain tight-fisted," said a bank functionary monitoring the tight credit situation.

The cut in CRR would effectively mean that banks need to maintain a smaller proportion of their reserves with the RBI, thus releasing more funds to lend. Similarly, the central bank foregoing the option of reverse repo would mean that it would not soak up money from the banks, thereby leaving them more funds to loan.

While the two measures are aimed at boosting liquidity, the proposal to cut interest rates is aimed at making credit available to companies at reasonable rates. As inflation rose, the RBI had successively hiked interest rates and though price rise remains an important concern for a government faced with looming elections, the government now strongly favours restoring liquidity.

Some companies have been apprehensive about CRR cuts easing the liquidity situation but inadequate to fund expansion plans. They argued that this would curb the momentum of growth.

While liquidity remains the prime concern, the government clearly feels the need to address market volatility as well. Hence the idea of banning short selling. Short selling means an investors sells of shares he does not possess. It has already been banned in the US, Italy and China in an attempt to check market downslide.

Experts are divided on whether it is an effective measure. Those against it point out that the month-long ban in the US, which has just ended, failed to achieve anything. In fact, they argue, the stocks protected by the ban only become more volatile and some of their prices dropped more sharply than others.


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