India's Banks Will Lend. Will Tycoons Borrow?

THERE'S PLENTY OF talk about how India's 600-million-strong workforce gives it a unique edge in the US-China spat over trade and technology. But to be the world's next factory, the most-populous nation will need a strong domestic investment impulse.

- Bloomberg

The data don't show any evidence of that. Nor does the authorities' response inspire confidence. When it comes to large, long-gestation projects, a handful of tycoons will do the heavy-lifting, and it will take more than cheaper borrowing costs to sway their decisions.

Sanjay Malhotra, the new Reserve Bank of India governor, has thrown the kitchen sink at what is basically a problem of comatose animal spirits. Within six months of his appointment, he slashed the benchmark interest rate by 1 percentage point to 5.5% and flooded the banking system with liquidity. He also eased financing norms for small individual borrowers that rely on microcredit, or loans against gold jewellery.

All this will have an indirect effect at best. The real-estate industry may gain as lower mortgage costs entice homebuyers. However, a broader investment-led credit cycle continues to elude. Which is why the RBI has now mandated that banks set aside 1-1.25% of their loans to unfinished projects to offset any losses. The requirement drops to 0.4-1% when assets start generating cash.