The Indian eco-nomy has been facing problems like weak agriculture, low job creation, slowdown in manu-facturing and mining, and low private in-vestments. Even private consumption, which had been one of the main drivers of growth of the Indian economy for quite some years, may gradually lose steam if there is no significant shift of economic policy. What has been identified as an important impediment to economic growth is unavailability of loanable funds which has led to a crisis of capital.
Problem with banking industry
The banking sector has been in bad shape for quite some time. The Non-Performing Assets (NPAs) of all Scheduled Commercial Banks (SCBs) stood at Rs. 10.4 trillion in 2017-18.
But the NPA ratio has already started falling marginally. The banking industry is also facing recovery of loans from its debtors. A large section of the corporate world has been in stress. It is not only limited to the power sector, the telecom sector and the steel sector. A large number of business units are facing a recovery crisis. Many banks, on the other hand, are trying to look for retail, agriculture and manufacturing sectors for its financial loans. But fresh problems of NPAs have come out. The NPAs are now spreading to sectors like MSME, real estate, agriculture and to the realm of the Non-Banking Financial Companies (NBFCs). The case of NBFCs is important for discussion.
How to increase liquidity in the market?
A. Pradhan, MD, CEO, United Bank of India said that there were three immediate steps to be taken to increase liquidity in the economy. First, the big stalled projects were to be initiated as soon as possible. There are many stalled projects in sectors like power and roads. If one considered the power sector, it is clear that there were several coal and power purchasing agreement issue. If the power sector revives, it could potentially release Rs. 2000 crore to the banks.
Secondly, the MSMEs are still in trouble. The cash flow mismatch of this sector has initiated again. Therefore, restructuring of the MSME sector is needed. Thirdly, the finance department should infuse money into the banks in one go. Only in that situation, the banks can use the funds as growth capital. Earlier, banks were infused with money but used that as regulatory capital. Infusions of funds in one go is important because in that case only, the received funds can be used for disbursing loans to clients expediently.
Economists think that there are two things responsible for low cash availability in the Indian economy. First, is piling up of unsold items of consumer durables, including motor vehicles, electronic and electrical items. Second, the central government has not paid a huge amount of money, after completion of the government jobs, to private entities in the last FY. It is expected that after the passing of the coming Union Budget, funds may be released in a phased manner. In that case, flow of money in the economy may increase to an extent.