Great Indian bailout planned for markets
Cheaper Credit, More Funds For AAA Companies
With liquidity becoming the immediate priority of the government, it is looking at a slew of measures to make more funds available to the credit market and there are strong indications that banks may be nudged to lend to companies with good credit track records.
Official sources told STOI that a further cut in the cash reserve ratio (CRR), a reduction in interest rates, a ‘ban’ on reverse repo are some of the options being looked at to augment liquidity, while a ban on short selling is being considered as a way of curbing bearish sentiments in the markets.
It is also learnt that a proposal to dilute mark-to-market norms for banks is being seriously 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 the losses that would accrue if they actually valued them at current levels.
In addition to these measures, banks might be informally told that they should lend to corporates with AAA ratings. This is because of the fear that restoring liquidity to banks will serve little purpose if they continue 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 for them to lend. Similarly, the central bank foregoing the option of reverse repo would mean that it will not soak up money from the banks by borrowings, which again would leave them with more loanable funds.
While these two measures are aimed at boosting liquidity, the proposal to cut interest rates is aimed at making credit available at reasonable rates for corporates. RBI had successively hiked interest rates as inflation rose and though price rise remains an important concern for the government with elections looming, there is now a strong view in the government to focus on restoring liquidity right now.
The government also feels the need to address the volatility in markets. Hence, the idea of banning short selling. Short selling, in which investors sell shares without possessing them, is already banned in the US, Italy and China to check the market downslide.
ON THE ANVIL
- Banks to be goaded to lend to AAA-rated companies so that their expansion plans don’t get stymied
- RBI to stop using reverse repo to mop up funds from banking system
- CRR could be cut further to add to banks’ liquidity
- Interest rates might be reduced to make credit cheaper
- Mark-to-market norms might be diluted to help banks avoid loss provisioning
- Short-selling in stock market could be banned to curb bearish sentiments
Rich nations roll out five-point rescue plan
The United States and six of the world’s other richest nations agreed on Friday on a five-point plan to rescue the financial industry.
The G-7 nations agreed that the enormity of the crisis called for a global response, US President George W Bush said after the talks.
He also warned individual nations against taking action that could hurt others. It has been a disastrous week for markets around the world, a week that has seen trillions wiped off the value of shares.
The plan, among other suggestions, asks nations to take decisive action and use all available tools to prevent “important’’ institutions from failing; unfreeze credit and money markets and ensure that banks and other institutions have broad access to liquidity and funding; and ensure that banks can raise enough capital from public and private sources to re-establish confidence and kickstart lending to individuals and businesses.
Treasury officials said the US might embark on direct injection of capital into banks in the next two weeks. But Bush cautioned that results would take time. “The benefits will not be realised overnight,’’ he said.
The discussions focused on the growing likelihood that the US and major European countries would have to partially nationalise their banking systems. Such a step would have been unlikely in many countries even a week ago, but the swiftness of events is forcing officials to throw out decades of conventional wisdom about how free markets should operate.