Monday, November 24, 2008

Directed bank lending

Remember directed lending? That was in the bad old days post bank nationalisation when banks were told whom to lend, how much and at what rates. Banks in the west are reluctant to lend despite governments infusing capital into them. Lack of funds is killing the real economy. So what can governments do? Incredible as it may sound, FT wants governments to compel banks to lend, using their newly found clout as owners of equity in these banks and, if necessary, by getting full control over them!

If evidence emerges that banks are not lending because they are hoarding cash to pay off the expensive preference shares taken by governments, the rescue can be restructured. One option would be to give governments more control of the banks; another would be to reduce the short-term costs of the capital.

.....But banks, which have always been dependent on the largesse of taxpayers, could be forced to adopt central targets for new lending. This would overcome the problem of no institution wishing to be the first-mover. And banks would have little choice but to obey; if they are unco-operative, they could end up in public ownership
Why blame Mr Chidambaram for leaning on public sector banks to lend? I, for one, would not fault him for that. My only plea is: don't dictate the lending rate as well, leave that to the judgement of the banks. When banks are asked to expose their exposures to particular corporates, then commercial logic dictates that lending rates should rise, not fall.

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