With reference to A V Rajwade's column, "Some end-of-the-year thoughts" (December 31, 2015), the financial economy becoming the master of the real economy is not good news for India or the world. The implications of such a phenomenon are clear: Borrowing companies have leveraged their balance sheets without a corresponding stake. Lenders did not bother about the ubiquitous ratio, that is, debt-equity. Interest cover was never taken into account to determine borrowers' ability to service loans. No wonder lenders are now at the mercy of their borrowers. This is at least true of lenders in India, especially the public sector banks.
There is another dimension to this issue. When the financial economy dominates the real economy, its market capitalisation also exceeds that of participants in the real economy. Lenders are growing faster than the players in the real economy. This is quite dangerous. Supporting institutions (read lenders) have overlooked the basic parameters of lending and the results are evident.
Another point is the reference to the mortgage market crisis of 2007-08. The impact of the crisis was the most in the US. Master global lenders overlooked the basic canons of lending. When refinancing lenders cannot finance the original mortgages due to improper ownership, how can they finance the sub-prime lenders, who have financed those mortgages?
The columnist is a veteran banker and from the same stable to which this letter writer belonged. I hope he share my concerns.
K V Rao Bengaluru
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