Many American companies especially banks and other finance companies have either failed or are at the verge of failure. Now the impact of this financial crisis is spreading to European and Asian countries also. Governments of US and European countries have already announced bail packages to save their sinking economies. This crisis of US has alarmed central banks all around the world. Even Reserve Bank of India has announced various measures including drastic reduction in CRR. Share Markets all around the world are under turmoil.
In these circumstances Indian share market is also under severe stress. Panic selling in the share markets is pushing them to the bottom. But we must understand that there is a marked difference between Indian economy and economies of US and Europe. If we take a minute look at this crisis, we find that it started with sub-prime crisis in US. It happened like this that US banks gave loans at a large scale, without giving due consideration to the repaying capacity of the borrowers. It is well known with regard to credit card based US economy that American people spend more than their incomes. Inability of the American people to repay their loans led to large scale acquisition of their houses by the banks. Sale of these acquired houses by banks resulted in steep fall in the property prices. US banks increased heavy losses due to their inability to recover their loans. Another cause of heavy loss by these banks was due to their excessive involvement in forward trading. According to a rough estimate, hedge funds had put in 13 trillion US dollars in forward trading of crude oil. Initially price of crude oil jumped to around 150 US dollars per barrel but ultimately tumbled to near 80 US dollars per barrel, thanks to sharp reduction in demand for crude oil from US and European countries and increase in production by OPEC countries. This factor has also contributed to the crisis of US and European financial institutions. Lehman Brothers, who used to ‘educate’ the world about how to make investments have applied for bankruptcy and condition of many other financial institution is no better.
Condition of India in this context is much different and much better. Loan are given by Indian banks on solid basis. Though its correct that some times Indian banks also indulge in unsafe lending. Such kind of loans, repayment of which is irregular are defined as Non Performing Assets (NPAs). These NPAs normally don’t exceed more than 5 to 7 percent of total loans by these banks. These NPAs are also not completely bad debts. Indian banks never lend like US banks. Sometimes Indians banks face the criticism that they undertake too much of paper work. But Indian banks don’t lend without a solid collateral. Apart from this Indian banks have to keep a major portion of their deposits with Reserve Bank of India in the form of cash reserves or have to invested in government securities as per the directions of RBI. Thus these banks have very little to spare for even lending. Being under the control of the government, these banks make minimum involvement in forward trading. It is natural that due to government control the public sectors banks are not able to earn heavy profits but at the same time there is no threat to their stability.
In the last do decades some private banks have also come up in India. These banks do lend more than their capacity and even take risk involving themselves in forward trading. Some of these banks have definitely burned their hands in this American crisis and have lost a few thousand crores of rupees in the process. Rumors are on regarding probable failure of these banks. But we must keep in mind that these banks also function under the rules framed by RBI. According to these rules they have to invest heavily in government securities and keep a sizeable portion of their assets with RBI in the form of cash reserves. Even home loans given by these banks are also on solid footings. Thus in the present circumstances there is no dangers to these banks also. Thus we can say that there is no danger of failure of any Indian bank.
Indian industry is also growing at fast pace, thanks to strong domestic demand. Despite all these problems Indian economy is all set to grow between 7 to 8 percent in the current financial year. Any turmoil in the share markets is not due to any problem within Indian economy. It is all because of large scale outflow of funds by Foreign Institutional Investors (FIIs). These FIIs are indulging in panic selling in share markets. In the process they are purchasing dollars from RBI and transferring these dollars to their home countries. This is leading to sudden shortage of liquidity in Indian markets. Due to sudden increase in the demand for dollars value of rupee is also going down. But this problem is only for short term.
For the last two decades our policy makers had been teaching the benefits of ‘integrating’ with the rest of the world. It was being told that the whole universe is like a village and therefore we should increase our economic relations with the rest of the world. But these people only are now proudly saying that Indian economy is ‘insulated’ from the rest of the world and therefore world recession is not going to affect our economy in any major way. Recent events have sufficiently proved that there should not be any blind integration with the rest of the world. We should have economic relations with the rest of the world only to the extent that our interests are not harmed in the process. Everything what glitters is not gold has been amply proved by the sudden collapse of US financial system. Those who try to sell the dreams of making India, US or Europe should now realize that the need of the hour is to build new India keeping in view the Indian capacities, resources, opportunities and problems.
The time is not good for investors in the share markets. But there is no need to panic as well. Investors will have to keep patience. It would be better if they wait till settling of the dust of international turmoil.
