Govt agrees to infuse Rs 12,517 cr into PSU banks by March

…and not a whimper from any quarters.

Right under our nose, government is using our money for some sinister reasons and not one person from the media is standing up and asking a question, why?

Why in a potentially inflationary environment is government putting money into the system?

Why is the money required to be infused into the banks?

Why are the very banks whose NPAs are rising and have bad loans being incentivised by the government with our money?

When we have the RBI that looks over the banks , why does the government find it necessary to intervene?

Has the RBI become incompetent?

The question can even be extended to include why the deputy governor of RBI has been retired without finding his successor?

All these questions lead to a certain angling in the government quarters.

No one is telling the public that for 8 years now the PSU banks have been subsidising the big ticket real estate companies, all the time allowing them to keep up the prices of their real estate assets.

Do you know that if the banks were not financing and refinancing the same projects of realtors, we would be able to get the same flats for nearly half the prices.

However in the deal that is going around, if the banks allow the prices of the projects to be lowered/slashed, their own loans extended become more than the value of the assets.

In some cases the realtors had approached the banks for taking over their projects, since they did not have any buyers. In such cases the bank forwarded even more funds to the realtors to continue their projects.

How the NPAs(non performing assets of the banks rise):

A developer approaches a bank with a plan of building on a land that is not effectively his. Bank finances the loan for buying the land and the project at much higher value than the actual cost of the land (naturally because it is not developed).

When the project is launched , the buyer is encouraged to go for loan from the bank that has approved (financed) the project. Now effectively the builder shows that he has sold so much of the project (in terms of loan value and not the no. of flats or shops).

As a result now the bank has financed the project with 2 loans (1 to the builder and 1 to the buyer).

With time the builder effectively hikes his prices and has less and less buyers.

He approaches the bank (which is effectively hand in glove with the builder) to forward some more loan either to show extension of the project or a new project on the same land.

Now the bank has given a lot more loan than the asset value – these assets being illiquid cannot be realised.

The loans are not being serviced by the creditors and the builder is not interested in paying back anything , because he has recovered his margin by selling a few flats.

…and the process goes on.

In this entire tangle the only person losing out is the Indian public.

Which is either paying a lot more for it’s home – than it is worth it- as in Mumbai.

Or being made to pay indirectly by such “infusions” into the banking system by the government.

If you do not believe or understand the above.

Just imagine you receive 1 crore from your uncle in lieu of the financial hardship that you are undergoing because of some money you lent out to a friend or money that someone has taken from you and not returned to you.

How is this money going to look factually on your books?

You are going to receive it and say Ok now I don’t have to worry whether that guys pays me back or not.

That is how the bank are going to behave- and the system will go on and defer the problem.

This is exactly what happened with the subprime crisis in the US.

Same thing is going to happen here whether we have subprime rate or not.

What we should raise our voice in the parliament is not against FDI and other things.

We should raise our voice against financial impropriety being conducted by the government because we have a strong and a worthy RBI and a unflinching governor.

How I wish our primeminister would have been like that.

Alas! To think that he was a RBI governor once too.