Monetary Policy and the Non-Performing-Assets...

The problem of Non-Performing-Assets (NPAs) or bad loans in the INDIAn economy is same as the faced by most of the countries after booms, during booms demand is high which leads to more investment, but when demand goes down due to inflation and tightening and unemployment goes up that reduces the gap between nominal and real prices of assets i.e. inflation adjusted prices, when demand is brought down to the supply by increasing interest rates to keep prices stable. When nominal prices are above the real prices of assets it means demand is higher than supply and the equilibrium is brought by equalizing the both prices by tightening the money-supply and when supply is greater than demand the central bank again tries to equalize the both prices and bring stability by decreasing money-supply and increasing the interest rate. To store equilibrium it is important to bring demand and supply equality with full-employment and that is restored when the difference between nominal and real prices, i.e. inflation, is zero. However, supply-side problems and full employment are often responsible for overheating for which a lower borrowing cost might also help with a time-lag, the RBI might also try to increase supply by cheap credit. Therefore, to keep inflation and inflation expectations low and to bring equilibrium in demand and supply the RBI had increased the interest rates when inflation increased double digits after the Financial-Crisis 2008 reinforcements which made investment costly and turned many loans bad due to low income flows and demand in the economy. But, it is natural for some debt to go bad because any business is risky due to a low demand cycle, busts or slowdown; the INDIAn economy is still recovering from a slowdown, nonetheless its growth is fastest among the major economies, but bad loans from the past boom is still endangering a full-fledged recovery and robust job creation to provide 1.7 million jobs to its workforce every year, a target that has been consistently undershot. NPAs are a blot on the bank finance which must be removed by effective measures undertaken by the policy-makers, especially the RBI which is important for the regulation of credit in the economy, the government has also assured recapitalization of banks through the budgets, but it is insufficient given the magnitude of the problem which hovers over Rs 10 trillion. This money is a big drag on the credit creation power of the banks, especially the public-sector, through which the RBI regulates demand/supply, prices and growth in the economy and it is expected that it will soon come up a credible plan to curb bad loans. Higher interest rate itself could be a reason for bad loans, lower borrowing cost could bring some of the investments back, and it is big relief. Bailing-out or monetising the debt has been a practice that is frequently used to correct commercial banks balance sheets. When subprime loans gone bad during 2008 recession, the US government bailed out big banks and the Fed conducted the quantitative easing program to improve banks’ balance sheets, it cut down on reserve requirements and repo-rates, it administered a huge asset purchase program which lowered both long-run and short run interest rates which increased the capacity of banks to provide credit, the government too reduced its finances which left more money for the private sector. INDIA too should come-up with ideas to correct the problem of bad loans and low demand and growth, for which the US sub-Prime Crisis might provide a right framework........