INSUBCONTINENT EXCLUSIVE:
Equity is overpriced, in general, thanks to global oversupply of money following years of quantitative easing by the US, the EU and Japan
Debt has turned risky, apart from government debt, after the ILFS default and its impact on other non-banking finance companies.
Many NBFCs,
including troubled Dewan Housing, lend to builders of real estate, who are in trouble in most parts of the country, having taken on huge
quantities of debt, started projects that called for even more funding and then got stuck, as debt servicing and rollover for themselves and
their financiers got interrupted
Banks that have lent to either the realtors or their home buying customers also run the risk of accumulating yet more bad loans
This prospect makes them chary of fresh lending and regardless of how sharply the central bank lowers its policy rates, credit flow to the
economy would remain anaemic
Merely making liquidity available will not work, because both the end recipients of the liquidity, say, real estate, and the intermediaries
through which the liquidity is transmitted to the end-recipient face uncertainty of funding.
To end that uncertainty is the key
That calls for a bailout of large projects that are inherently viable and the assurance that they would receive the funds for a bailout,
even if their promoters have to surrender a part of their stake to the agency that provides them with the funds
Compared to the alternative, a reduction in their own stake would be eminently acceptable
The banks can, with government backing, put together such a bailout, working together
Once their viability is ensured, their smaller financiers would become viable and their debt relatively safe for MFs to invest in
This is the way to protect retail investors, MFs and the banks.
