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Banks to face dire consequences for govt's contradictory borrowing policy

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20th-Jan-2020       
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THE government is borrowing funds from banks at more than 9 per cent interest rates against treasury bills and bonds, which contradicts its move to force banks to implement 9 per cent lending rate. As per rules, lending to the government or even against any government guarantee does not create any financial vulnerability to banks as it is considered risk-free. The central bank does not include any amount of lending to the government in banks' risk weighted assets, meaning that the banks are exempted from keeping any capital against such borrowing. But, banks' lending to the private sectors is considered risky as there are always risks of defaulting, the officials said. Whenever the government borrows excessively from the private financial markets there is a 'crowding out' effect which means that basically that the government is exhausting the capacity of the private financial markets to give out loans by borrowing at rates higher than normal market rates.
In this case the government has fixed the interest rates for banks at 9 per cent but is giving higher rates, thus 'crowding out' the ability of banks to get or give funds at higher rates. This seems to be very simple but in reality it has profound effects on the economy. It decreases private sector investment---which is the main vehicle for increasing economic growth, as only the private sector can create new jobs by high levels of investment. The public sector can't sustain high levels of job creation forever--and in any event its massive investments in public infrastructure mean that it can't create jobs in a high enough ratio compared to its investment levels. So it's essentially left to the private sector to create jobs--but it's something which they can't do if the government borrows such a high level of funds.
It's time that the government cut its shirt according to its cloth. Reducing expenditure by rooting out unnecessary spending and  corruption in procurement and realisation of projects should be its main aim--not squeezing out funds for the private sector, which it must realise is the best engine for economic growth.


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