bank's policy rate of 8 percent will have some impact on borrowing decisions; but it will be small and come with a considerable lag. Meanwhile, more existing bank loans will go bad. By March next year, 10 percent or more of Indian lenders' loan books will consist of either non-performing or restructured debt, according to Fitch Ratings. It isn't easy to revive investments when lenders, especially state-run banks, are struggling to cope with past mistakes.
Borrowers, too, are in dire straits. The most intrepid investors between 2004 and 2007 were home-grown entrepreneurs and business families. They behaved very differently from government-owned companies and multinationals by gallantly expanding into industries about which they knew little. These growth champions are today among the most indebted Indian businesses, according to research by brokerage firm Jefferies.
One obvious solution is for the government to inject fresh capital into state-run banks. The $3 billion that the government has set aside for this purpose in this year's federal budget is inadequate. Just one debtor - Kingfisher Airlines - owes lenders more than $1 billion. If the grounded carrier doesn't fly again, very little of this amount may be recovered.
As the controlling shareholder, the government should do much more to bolster the balance sheets of state banks. But it is also cash-strapped. A recent auction of telecom spectrum fetched the exchequer less than a fourth of the $7 billion revenue target. The annual budget deficit is at risk of wildly overshooting finance minister P Chidambaram's revised goal of 5.3 percent of GDP.
Chidambaram is trying a different strategy to end the credit downturn. He has asked the central bank to start giving out new banking licences quickly. Tactically, it is a smart ploy. New private lenders will bring in fresh equity and give the jaded banking system an additional loss-absorbing cushion.
But the Reserve Bank of India, which hasn't issued any new banking licences in 10 years, is holding up the finance ministry's plan, and for good reasons. Before it allows new deposit-taking institutions to be set up, including by non-financial corporate groups, the RBI, which is also the country's banking supervisor, wants the legal authority to sack rogue bank boards. Amendments to the country's banking laws that would have accorded the monetary authority such wide-ranging powers were introduced in parliament seven years ago. They were never passed. The central bank is quite right to be circumspect, even at