OPENING THE FLOOD GATES

By easing a host of regulations, the Reserve Bank of India is looking to revive credit flow to India Inc. But this may add fresh risks

- ANAND ADHIKARI

IN 1989, at the height of what is considered the Japanese “bubble economy”, Sony Corporation acquired US-based Columbia Pictures in a multi-billion-dollar deal.

The same year, another Japanese giant, Mitsubishi Estate, bought a controlling stake in US-headquartered Rockefeller Center, the crown of Manhattan’s skyline. These marquee deals, among many others across the globe, were hailed as symbols of Japan’s newfound financial might.

There was another aspect common to these mega deals—they were heavily backed by bank credit. Japanese banks lent aggressively to fund corporate acquisitions, and when asset prices collapsed in the early '90s, it triggered an avalanche of bad debt. It took banks decades to repair their balance sheets.

The Japanese experience has come back into discussion after the Reserve Bank of India’s (RBI’s) big bang measures to improve credit flow to industry at the beginning of October.

The RBI has allowed banks to fund mergers and acquisitions (M&As) —an activity they were banned from for decades. Banks’ foreign branches have been permitted to extend rupee-denominated loans to residents of neighbouring countries such as Nepal, Bhutan, and Sri Lanka. This is something Chinese banks have been doing of late. The RBI also announced relaxations in lending against volatile assets like shares, real estate investment trusts (REITs) and infrastructure investment trust (InvITs).

These are of a piece with other measures announced by the government, like the reduction in goods and services tax and income tax rates, and the RBI’s earlier decisions to cut interest rates. Together, these are expected to firm up domestic demand as India grapples with an increasingly uncertain external trade landscape amid fears of a growth slowdown in advanced economies next year because of US President Donald Trump's tariff policies.