Credit Policy - Reddy has called it wrong

Reddy has called it wrong this time.

Indian economy is not leveraged asCredit Policy, Housing, much as that of the other developed economies and it is the supply side dynamics which is contributing to the double digit inflation. Some even argue that this effort of the central bank may further accentuate the problems caused by supply side dynamics due to the capacity addition being delayed mainly due to the steep increase in funding costs.

The policy initiatives of the nineties have dismantled the Long term Funding institutions, which has pushed India Inc to look at the global markets for raising long term funds. Having taken this route they are now forced to call correctly the exchange rate movement. The companies which are not capitalized adequately, or are afraid to go to the international market for want of loosing control, silently suffer. This in the long term, affects the economy as planned capacity additions do not take place. Policy makers have failed to acknowledge this void and take steps to correct.

At the other end of the spectrum, the needy do not have any access to institutional funds. Attempts to eliminate the usury rates charged by the middleman have failed miserably. With the so called growth in bank credit being fueled by indiscriminate lending to salaried and self employed persons for consumer durables and lavish spending, it is repaying time for these institutions, with even the central bank taking special interest in these advances. Defaults in certain locations are a staggering 40 % in this segment, if we are to believe unconfirmed reports.

For lending to the housing segment and make it robust, we have important lessons to learn from US. The Fed had openly issued government guarantees to Fannie Mae the share holder owned financial institutions with a public mission. These institutions are private in nature but backed by the government. Hence these banks could approach the international market to raise cheap funds and provide funds exclusively for the domestic housing market.

It is time we also did the same thing. The government should guarantee the bonds issued by say a division of ICICI or AXIS or HDFC bank or a combination of the divisions of the banks with a caveat that funds raised thus are exclusively used for a defined housing market.

In the last 3 years the housing sector saw a robust growth and provided the much needed overall growth in GDP. The current attempts by the central bank to chase the inflation is hurting these segments and will once again deprive many a citizen the chance of owning a home in his or her life time. Will the government at least intervene?