With investors shying away from equities, we are gradually witnessing the emergence of a debt market. A host of companies have already started raising fund through debt. Is the liquidity crunch the answer to the stagnation in industry? I, for one, would tend to disagree. The real problem we face is that of productivity and a weak infrastructure.

Well, it seems that the Reserve Bank, along with our financial institutions, view the problem differently. Their answer to the problem of industrial slowdown is to make cheap finance available. Financial institutions have reduced lending rates, and are now directly competing with banks. I doubt they will be able to withstand the competition in the absence of a retail-depositor network. Liberalisation exposes banks and institutions to new risks. If they do not take proper precautions, a crisis is more likely.

The lifting of restrictions often releases pent-up demand for credit which can lead to an uncontrolled lending boom. The most important precaution is improved supervision to monitor risks. Our banks and institutions have grown fat on a captive market. They will have to learn to analyse credit risks, which takes time and training. It is not the size of the balance sheet but the quality of the lending which will matter. Talking about achieving lending targets by cutting medium-term prime lending rates only shows the inability to acknowledge the changing times.

Today, what we are trying to do is raise capital, employ it unproductively and lose it. Since this makes us poor, we go and raise capital again only to abuse it. Lowering interest rates is not the answer to our problems. A good monetary policy or a salutary budget is not going to solve problems.

Increasing productivity requires hard and tough decisions like doing away with subsidies, exit policy, encouraging foreign direct investment among other things.

Interest rates have been brought down with the expectation that credit offtake will improve. The new mantra is to tap the capital market via the debt route. Even mutual funds have joined the bandwagon with fixed-income schemes. Investors have lost money in equities. This time around, they will have to be very careful. They cannot afford to make such mistakes in the debt market. The notion that the debt markets are safer than equity is wrong. The reason: When companies borrow through debt and cannot efficiently employ the capital, they become poor, and finally close shop. The excesses in equity markets will be repeated in the debt segment. We will see many defaults in the corporate sector. Half-way through half- hearted liberalisation, it is going to be very painful. Investors should first look at the quality of management. Second, go in for short-maturity debt. Let not greed become your graveyard when you invest in debt instruments.

(The author is chairman of Parag Parikh Financial Advisory Services Ltd)

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.