ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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A Bridge Too Many

THE Reserve Bank of India's measures to prevent use of bank funds by non-banking financial companies (NBFCs) in the share market and in other extramural activities have come up against severe criticism. The measures, the critics have pointed out, amount to a return to regulation and interference with the banks' freedom to take their lending decisions. The central banking authority has also been charged with extending step-motherly treatment to the private financial companies. In a way, the RBI and the government are entirely to blame if the much-needed measures now introduced have attracted widespread criticism. Apart from having encouraged an environment of unbridled financial dealings, piled layer upon layer, far beyond the requirements of the real sectors of the economy, they have been guilty of generating extravagant expectations of gains from share market operations. The bigger companies who have raised funds from the Euro-dollar market, ostensibly for productive investment, have been allowed to merrily divert these funds to the share market. Together with the investments by the FIls, this has been responsible for the share market boom and the disproportionate rise in capitalisation values. Further, banks have been permitted to lend against company shares and the RBI has been taking credit for its policies having succeeded in closely linking the money and capital markets. In fact the objective should have been precisely the opposite to ensure that the money and capital markets retained their traditional arms- length relationship so that the savings mobilised by the commercial banks found their outlet essentially in productive investment. It is because of this misconceived approach of the RBI and the finance ministry to financial sector development that their present entirely justified directives have been sought to be misrepresented as micro-level regulation and interference in the commercial operations of banks. The RBI and the government have to adopt a consistent approach to the proliferation of financial dealings and bank lending against shares in particular. The steps now taken to ban banks granting bridge loans and interim finance to the NBFCs against equity and debenture issues and other long-term funds including deposits intended to be raised from the market are wholly unexceptionable and were in fact overdue. What is unfortunate is that for so long the RBI should have been content to be a spectator as banks have vied with one another to lend against shares and consumer durables even as they have failed miserably to reach the rural and informal productive sectors starved of finance.

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