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HDFC Bank cuts rates for used carsUnion Bank starts auditing branchesPvt banks pip public peers in NPAsBanks likely to retain home loan rates

: Riding on excess liquidity and demographic dividend-oung nation, building homes, buying and spending-ndian small industries have been clocking double-digit growth for the last few years: 10.88% in FY05; 12.32% in FY06; and 12.65% in FY07. The sectors leading the growth have been: housing, auto and white goods in the domestic market and apparel & textiles and gems & jewelry in the export market. All these sectors are small industry-dominated.

But two developments proved spoilers. The sub-prime crisis in the US that later snowballed into a full fledged financial crisis, and, high inflation, particularly in India. In order to contain inflation, RBI squeezed money supply and hiked interest rates over the last four years. The tipping point came in September this year when the tap on excess liquidity was suddenly turned off in the US markets with the fall of their top investment bankers. Panic spread across the financial markets in the world. Indian corporates and banks, which generously tapped these financial markets for cheap short-term funds through ECBs and a range of new-age financial instruments, suddenly found the door firmly shut. They returned to Indian banks. Frightened, the Indian banks refused to part with funds to all borrowers: big or small. By September end, half the small industries were reeling under a severe financial crunch and their day-to-day operations were affected. Even basic banking facilities such as overdrafts and financing of letter of credits were not spared.

Many people criticised RBI’s sole reliance on monetary measures and warned that in spite of India’s unique demographic profile and growth potential, its policies would stifle growth. With the corporate sector delaying payment to small suppliers and banks husbanding capital, small industries were left high and dry—no order, no cash.

The Economist’s analysis on the issue (October 23 ’08) is instructive: “The economic slowdown evident in America and Europe was regrettable, but central bankers in many emerging economies, such as India and Brazil, were busy engineering slowdowns of their own to reverse high inflation. They were more interested in the price of oil than the price of inter-bank borrowing”.

Sectors that were leading growth and creating employment started collapsing one after another: housing, auto, white goods. Exports started dwindling due to the slump in major markets. The cascading impact of these sectors fell on long supply chains down the line.