I submit below some readable inputs collcted from various sources .
The Reserve Bank of India has announced a new methodology of setting lending rate by commercial banks under the name Marginal Cost of Funds based Lending Rate (MCLR). It will modify the existing base rate system from April 2016 onwards.
As per the new guidelines by the RBI, banks have to prepare Marginal Cost of Funds based Lending Rate (MCLR) which will be the internal benchmark lending rates. Based upon this MCLR, interest rate for different types of customers should be fixed in accordance with their risk assessment.
The MCLR should be revised monthly by considering some new factors including the repo rate and other borrowing rates. Specifically the repo rate and other borrowing rate that were not explicitly considered under the base rate system.
As per the new guidelines, banks have to set five benchmark rates for different tenure or time periods ranging from overnight (one day) rates to one year.
The new methodology uses the marginal cost or latest cost conditions reflected in the interest rate given by the banks for obtaining funds (from deposits and while borrowing from RBI) while setting their lending rate.
This means that the interest rate given by a bank for deposits and the repo rate (for obtaining funds from the RBI) are the decisive factors in the calculation of MCLR.
Why the MCLR reform?
At present, the banks are slightly slow to change their interest rate in accordance with repo rate change by the RBI.
Commercial banks are significantly depending upon the RBI’s LAF repo to get short term funds. But they are reluctant to change their individual lending rates and deposit rates with periodic changes in repo rate.
Whenever the RBI is changing the repo rate, it was verbally compelling banks to make changes in their lending rate. The purpose of changing the repo is realized only if the banks are changing their individual lending and deposit rates.
Implication on monetary policy
Now, the novel element of the MCLR system is that it facilitates the so called monetary transmission. It is mandatory for banks to consider the repo rate while calculating their MCLR.
The RBI calls the effective passing of repo rate change into interest rate change by the banking system as an important part of monetary transmission. Monetary transmission in complete sense is the way in which a monetary policy signal (like a repo rate cut) is passed into the economy in producing the set objectives.
We may take the case of a repo rate reduction by the RBI. It is aimed to reduce overall interest rate in the economy and thus promoting loans for consumption and investment. This consumption and investment boost will be realized only if banks are cutting interest rate in response to the reduced repo rate.
Previously under the base rate system, banks were changing the base rate, only occasionally. They waited for long time or waited for large repo cuts to bring corresponding reduction in their base rate. Now with MCLR, banks are obliged to readjust interest rate monthly. This means that such quick revision will encourage them to consider the repo rate changes.
How to calculate MCLR
The concept of marginal is important to understand MCLR.
In economics sense, marginal means the additional or changed situation.
While calculating the lending rate, banks have to consider the changed cost conditions or the marginal cost conditions.
For banks, what are the costs for obtaining funds?
It is basically the interest rate given to the depositors (often referred as cost for the funds).
The MCLR norm describes different components of marginal costs. A novel factor is the inclusion of interest rate given to the RBI for getting short term funds – the repo rate in the calculation of lending rate.
Following are the main components of MCLR.
1. Marginal cost of funds;
2. Negative carry on account of CRR;
3. Operating costs;
4. Tenor premium.
Negative carry on account of CRR: It is the cost that the banks have to incur while keeping reserves with the RBI. The RBI is not giving an interest for CRR held by the banks. The cost of such funds kept idle can be charged from loans given to the people.
Operating cost: is the operating expenses incurred by the banks
Tenor premium: denotes that higher interest can be charged from long term loans
Marginal Cost: The marginal cost that is the novel element of the MCLR. The marginal cost of funds will comprise of Marginal cost of borrowings and return on networth.
According to the RBI, the Marginal Cost should be charged on the basis of following factors:
1. Interest rate given for various types of deposits- savings, current, term deposit, foreign currency deposit
2. Borrowings – Short term interest rate or the Repo rate etc., Long term rupee borrowing rate
3. Return on networth – in accordance with capital adequacy norms.
The marginal cost of borrowings shall have a weightage of 92% of Marginal Cost of Funds while return on networth will have the balance weightage of 8%.
In essence, the MCLR is determined largely by the marginal cost for funds and especially by the deposit rate and by the repo rate. Any change in repo rate brings changes in marginal cost and hence the MCLR should also be changed.
According to the RBI guideline, actual lending rates will be determined by adding the components of spread to the MCLR. Spread means that banks can charge higher interest rate depending upon the riskiness of the borrower.
Powerful element of the MCLR system form the monetary policy angle is that banks have to revise their marginal cost on a monthly basis.
According to the RBI guideline, “Banks will review and publish their MCLR of different maturities every month on a pre-announced date.” Such a monthly revision will compel the banks to consider the change in repo rate change if any made by the RBI during the month.
Regarding the status-quo of base rate, the initial guidelines from the RBI indicate that the Base rate will be replaced by the MCLR. “Existing loans and credit limits linked to the Base Rate may continue till repayment or renewal, as the case may be. Existing borrowers will also have the option to move to the Marginal Cost of Funds based Lending Rate (MCLR) linked loan at mutually acceptable terms.”
How MCLR is different from base rate?
The base rate or the standard lending rate by a bank is calculated on the basis of the following factors:
1. Cost for the funds (interest rate given for deposits),
2. Operating expenses,
3. Minimum rate of return (profit), and
4. Cost for the CRR (for the four percent CRR, the RBI is not giving any interest to the banks)
On the other hand, the MCLR is comprised of the following are the main components.
1. Marginal cost of funds;
2. Negative carry on account of CRR;
3. Operating costs;
4. Tenor premium
It is very clear that the CRR costs and operating expenses are the common factors for both base rate and the MCLR. The factor minimum rate of return is explicitly excluded under MCLR.
But the most important difference is the careful calculation of Marginal costs under MCLR. On the other hand under base rate, the cost is calculated on an average basis by simply averaging the interest rate incurred for deposits. The requirement that MCLR should be revised monthly makes the MCLR very dynamic compared to the base rate.
Under MCLR:
1. Costs that the bank is incurring to get funds (means deposit) is calculated on a marginal basis
2. The marginal costs include Repo rate; whereas this was not included under the base rate.
3. Many other interest rates usually incurred by banks when mobilizing funds also to be carefully considered by banks when calculating the costs.
4. The MCLR should be revised monthly.
5. A tenor premium or higher interest rate for long term loans should be included.
News On MCLR
The new methodology will come into effect from 1 April 2016 and is expected to curtail banks' ability to hold on to higher base rates despite the RBI slashing rates.
How it works
So far, banks followed diverse methodologies for computing the minimum rate at which they could lend—the base rate.
Now, the RBI has asked all banks to follow the marginal cost of funds method to arrive at their benchmark lending rate. MCLR will be calculated after factoring in banks' marginal cost of funds (largely, the interest at which banks borrow money), return on equity (a measure of bank's profitability), negative carry on account of cash reserve ratio (the cost that banks incur on account of keeping reserves with the RBI), operating costs and tenure premium (longer the loan term, higher the interest/premium).
The actual lending rate will be MCLR plus the spread determined by banks after taking into account their business strategy and credit risk of the borrower, among other parameters.
Banks can review MCLR once a quarter till March 2017, after which they will have have to publish the MCLR on a monthly basis. Lenders will also have to specify the interest reset dates on their floating rate loans. They can either grant loans with reset dates linked to the date of sanction, or the date of MCLR review.
The interest rate charged to a borrower will be applicable until the next reset date. The gap between two reset dates cannot be longer than a year
How it works
So far, banks followed diverse methodologies for computing the minimum rate at which they could lend—the base rate.
Now, the RBI has asked all banks to follow the marginal cost of funds method to arrive at their benchmark lending rate. MCLR will be calculated after factoring in banks' marginal cost of funds (largely, the interest at which banks borrow money), return on equity (a measure of bank's profitability), negative carry on account of cash reserve ratio (the cost that banks incur on account of keeping reserves with the RBI), operating costs and tenure premium (longer the loan term, higher the interest/premium).
The actual lending rate will be MCLR plus the spread determined by banks after taking into account their business strategy and credit risk of the borrower, among other parameters.
Banks can review MCLR once a quarter till March 2017, after which they will have have to publish the MCLR on a monthly basis. Lenders will also have to specify the interest reset dates on their floating rate loans. They can either grant loans with reset dates linked to the date of sanction, or the date of MCLR review.
The interest rate charged to a borrower will be applicable until the next reset date. The gap between two reset dates cannot be longer than a year
Read more at:
http://economictimes.
http://economictimes.
State Bank of India (SBI), India’s largest lender, was the first to announce the new marginal cost-based lending rate (MCLR), on 1 April 2016. This is the new benchmark lending rate and it replaces the base rate for new borrowers. SBI has introduced seven MCLRs for periods ranging between overnight and three years. While MCLR will be the benchmark rate for new borrowers, for existing borrowers, the base rate regime will continue.
Marginal cost of funds is the marginal cost of borrowing and return on net worth for banks. The operating cost includes cost of providing the loan product including cost of raising funds. Tenor premium arises from loan commitments with longer tenors
According to brokerage and investment group CLSA, the source of funding for a bank is based on actual domestic funding mix. MCLR is closely linked to the actual deposit rates.
“If one-year term deposit is at 7.50%. Then one-year MCLR will be 7.50% plus CRR, operation cost and tenor premium,” said Ashutosh Khajuria, executive director, Federal Bank Ltd.
The Reserve Bank of India (RBI) has asked banks to set at least five MCLR rates—overnight, one month, three month, six month and one year. Besides these, banks are free to set rates for longer durations as well. The rates have to be reviewed on a monthly basis, but banks that don’t have the capacity to do monthly reviews on can do so quarterly till March 2017.
MCLR-linked loans will be reset for a maximum of one year. So, you will have a new interest rate on your home loan at a pre-decided time and for a maximum period of one year.
Marginal cost of funds is the marginal cost of borrowing and return on net worth for banks. The operating cost includes cost of providing the loan product including cost of raising funds. Tenor premium arises from loan commitments with longer tenors
According to brokerage and investment group CLSA, the source of funding for a bank is based on actual domestic funding mix. MCLR is closely linked to the actual deposit rates.
“If one-year term deposit is at 7.50%. Then one-year MCLR will be 7.50% plus CRR, operation cost and tenor premium,” said Ashutosh Khajuria, executive director, Federal Bank Ltd.
The Reserve Bank of India (RBI) has asked banks to set at least five MCLR rates—overnight, one month, three month, six month and one year. Besides these, banks are free to set rates for longer durations as well. The rates have to be reviewed on a monthly basis, but banks that don’t have the capacity to do monthly reviews on can do so quarterly till March 2017.
MCLR-linked loans will be reset for a maximum of one year. So, you will have a new interest rate on your home loan at a pre-decided time and for a maximum period of one year.
How does MCLR work?
If you plan to take a floating rate home loan, your loan will now be linked to MCLR. Most banks have announced five to seven rates. For home loans, banks will either use the six-month MCLR or the one-year MCLR as the benchmark rate.
Therefore, from now, all floating rate loan agreements will have a reset clause at a pre-specified interval. “Banks can decide on the tenor that they want to use to reset for longer-term loans such as home loans. We have decided to reset home loan interest rates at a six-month frequency. Hence, the six-month MCLR will be applicable for home loans,” said Manian. Kotak Mahindra Bank has announced 9.40% as its six-month MCLR and the home loan will be reset every six months in case of any changes in MCLR. If you have a home loan, the bank will reset the rate automatically at a pre-specified date.
However, banks such as SBI and ICICI Bank Ltd have set one-year MCLR as the benchmark for home loans. For instance, for salaried individuals, ICICI Bank has set a floating rate home loan at one-year MCLR of 9.20% with a spread of 25 bps for loans of up to Rs.5 crore. So, the interest rate will be 9.45%. The bank’s website stated that this will be valid till 30 April 2016.
Though the MCLR is reviewed monthly, your home loan will be reset every year automatically, depending on the agreement with the bank.
For instance, if you take a Rs.30-lakh loan on 1 April this year, one-year MCLR is at 9.20% and spread on it is 25 bps, your home loan will be 9.45%. You will pay instalments at this rate for the next one year. If on 1 April 2017, one-year MCLR gets revised to 9.15%, your home loan interest rate will get reset at 9.40% (MCLR of 9.15% plus spread of 25 bps). Accordingly, your instalment or loan tenor may change.
According to a report by Ambit Capital Pvt. Ltd, RBI gave banks the provision of a reset period to partly smoothen the impact of changing rates on banks’ margins (as deposits re-price with a lag, reset periods allow bank to adjust the timing of loan pricing). As the concept of reset period contravenes with the RBI’s objective of quick transmission of monetary policy, the RBI has capped reset period at one year.
Though retail loans are likely to be set at six months to one-year MCLR tenors, corporate loans may be set at shorter tenors. “Due to complexity in the retail product, a pre-specified reset has been decided. When it comes to corporate loans, there is a possibility to negotiate across the multiple sets of rates that are available,” said Manian.
Can an existing borrower who is on a base rate regime move to MCLR? According to RBI, existing loans and credit limits linked to base rate will continue till repayment or renewal, and banks will have to continue publishing base rates as well. Existing borrowers can move to MCLR-linked loans at mutually acceptable terms and these loans will not be treated as foreclosure of existing facility.
What you should know
The MCLR-linked home loan rate is currently marginally lower than a base rate-linked loan. For instance, SBI was offering home loans between 9.50% and 9.55% till 31 March. From 1 April, the rate is lower by 10 bps and ranges between 9.40% and 9.45%.
According to the Ambit report, new MCLRs are not so different from base rates: “...even if benchmark rates would have fallen, the effective loan pricing for borrowers might not have changed much. This is because banks could change spreads over benchmark rates,” the report noted.
Home loan rates will now depend on the bank’s choice of reset period—six-month or one-year MCLR rate and spread rather than one common base rate and spread. According to a Centrum Broking Ltd report, while MCLR is intended to ensure effective policy transmission, past studies, including references to global banks, suggest limited rate transmission to end-user. Hence, its effectiveness in the longer run will need to be assessed, the report noted.
Existing borrowers should wait for the new system of calculation to settle before deciding to switch loans.
Retail lending, including home and car loans are soon to become cheaper with the Reserve Bank of India Governor Raghuram Rajan announcing a 25 basis points cut in repo rates in its credit policy on Tuesday.
With the RBI keen to ensure that banks transmit its interest rate cut signal to the customers, lenders may soon announce cut in lending rates.
Borrowing is significantly cheaper now and will continue to do so, Rajan said.
Here is a short take on how a matching 25 basis points cut in lending rate by banks would ease repayment burden of borrowers. However, the extent of absolute benefit will also depend on the loan amount and the tenure.
The Hindu
RBI cuts repo rate by 25 basis points
The Reserve Bank on Tuesday cut the key interest rate by 0.25 per cent and introduced a host of measures to smoothen liquidity supply so that banks can lend to the productive sectors and indicated accommodative stance going ahead.
Given weak private investment in the face of low capacity utilisation, a reduction in the policy rate by 0.25 per cent will help strengthen growth, RBI Governor Raghuram Rajan said in the first bi-monthly monetary policy review for the 2016-17 fiscal, which began on April 1.
Accordingly, the repo rate, at which RBI lends to the financial system, has come down to 6.5 per cent.
The cut was b
roadly in line with expectations. However, the stock market reacted negatively and the BSE index, Sensex, was down nearly 300 points.
Mr. Rajan also took a host of measures on the liquidity front, starting with the narrowing of the policy rate corridor to 0.50 per cent from the earlier 1 percentage point, which resulted in the reverse repo rate — at which banks can park excess funds with the RBI — being reset at 6 per cent.
The policy said the average overnight borrowings by banks have increased to Rs. 1,935 billion in march from Rs. 1,345 billion in January. Stating that the inflation objectives are closer to being realised and price-rise will hover around the 5 per cent mark for the remainder of the fiscal, Mr. Rajan reaffirmed that the monetary policy will continue to remain accommodative to address the growth concerns.
RBI also retained its GDP growth forecast at 7.6 per cent, on the assumption of a normal monsoon and a boost to consumption through the implementation of the Seventh Pay panel recommendations.
The central bank said it expects the implementation to hurt inflation by 1-1.5 per cent over a two year period, but added that the shock will not be as strong as that felt during the implementation of the sixth pay panel suggestions.
Mr. Rajan welcomed the government move to amend the RBI Act to create a monetary policy committee, saying it will further strengthen the policy's credibility.
He also welcomed the government’s adherence to the path of fiscal consolidation, calling it as a commendable commitment this will support the disinflation process going forward.
The central bank reiterated the need for a better translation of its policy actions into the lending rates by banks, adding that measures like reduction in the small savings rates, refinements in the liquidity management framework announced in the policy and the introduction of the marginal cost of lending based lending rates will help in this regard.
Mr. Rajan had last cut the key rates at the September 2015 review by a surprising 0.50 per cent, stating that the RBI is “frontloading” through the measure but affirmed that the central banks continues to hold the accommodative stance.
At 5.18 per cent for February, the headline inflation was trending lower than expectation, making it easier for the RBI to achieve its goals.
The government’s affirmation of sticking to the fiscal consolidation path in the budget by promising to bring down the fiscal deficit to 3.5 per cent in the current fiscal, and also a reduction in the small savings rates flagged by RBI in earlier policy announcements only bolstered the demands for the cut.
Repeated contraction in the factory output, which came in at a negative 1.5 per cent in January, had also upped the demands for the growth-boosting measure of a cut in the key policy rates.
With the liquidity being tight in the recent months, there were expectations of measures on this front.
On the regulatory side, RBI said it is mulling a regime where large borrowers (which account for a bulk of the NPAs) shall be mandated to go to the market for a part of their funding rather than relying on banks completely.
RBI also proposed to redefine bank branches and permissible methods of outreach. It will also issue a discussion paper to go ahead on the differentiated banking and look into the introduction of custodian banks and wholesale banks, the policy document said
RBI cuts rate, boosts liquidity: Here's how Rajan gave a pat on the back for Jaitley's Budget-First Post
The Reserve Bank of India today cut the repo rate by a further 25 bps and also took measures to ease the liquidity constraints in the banking system, giving hopes for the industry and consumers that interest rates in the economy will fall faster than earlier.
What are the actions taken by the central bank today?
For one, it cut the policy repo rate by 25 basis points from 6.75 percent to 6.5 percent;
Secondly, it reduced the minimum daily maintenance of banks' cash reserve ratio (CRR) from 95 percent of the requirement to 90 percent with effect from the fortnight beginning 16 April. CRR is the proportion of deposits banks need to keep with the RBI. It has kept the CRR unchanged at 4 percent of net demand and time liabilities (NDTL).
Thirdly, it narrowed the policy rate corridor from +/-100 basis points (bps) to +/- 50 bps by reducing the MSF rate by 75 basis points and increasing the reverse repo rate by 25 basis points, with a view to ensuring finer alignment of the weighted average call rate (WACR) with the repo rate;
All the moves are intended to push banks to cut interest rates further. Despite the RBI cutting policy rate by 125 basis points since January 2015, banks have only cut interest rates by 50-60 bps.
Two of the steps - on reverse repo and CRR - are aimed at increasing the liquidity with banks. With more cash in hand, banks should be able to cut rates at a faster clip. With the cut, the repo rate has hit the lowest in six years.
However, the rate cut comes even as there have been calls for deeper cut in the repo rate from various quarters. Some even called for a 100 bps cut.
So, why didn't the central bank go for a deeper cut?
The reason could be fears of inflation. It says inflation has evolved along the projected trajectory and also that CPI inflation is expected to decelerate modestly. It sees the rate around 5 percent during 2016-17. However, it has listed six uncertainties that are likely to throw the inflation scenario haywire. They are 1) recent unseasonal rains, 2) the likely spatial and temporal distribution of monsoon, 3) the low reservoir levels by historical averages, 4) the strength of the recent upturn in commodity prices, especially oil, 5) persistence of inflation in certain services, 6) the implementation of the 7th Central Pay Commission awards which will impart an upside to the baseline through direct and indirect effects.
Then why did the RBI cut the rate now?
Mainly because the government has stuck to the fi
scal consolidation path in the Budget for 2016-17. Another reason is the cut in the small savings rate affected by the government. The high interest rates offered on small savings has been forcing the banks to hold on to the rates for fear that savers may ditch them if they cut deposit rates. Moreover, the fears that inflation may spike has been offset by a few factors: 1) downside pressures stemming from tepid demand in the global economy, 2) the government’s effective supply side measures keeping a check on food prices, and 3) the Central government’s commendable commitment to fiscal consolidation.
Another reason for the cut is the wobbly economic growth. Though it has maintained the gross value added at 7.6%, the RBI sees three downside risks to growth: 1) the fading impact of lower input costs on value addition in manufacturing, 2) persisting corporate sector stress and risk aversion in the banking system, 3) the weaker global growth and trade outlook. The uneven growth is likely to strengthen in the current financial year provided the monsoon is normal.
"Given weak private investment in the face of low capacity utilisation, a reduction in the policy rate by 25 bps will help strengthen activity and aid the Government’s initiatives," the RBI said.
What does the RBI think of the Jaitley's Budget?
It has given a thumbs up to the Budget. For one the government sticking to fiscal consolidation path will help disinflation. Secondly, it has given a stamp of approval for the government's rural thrust. "The Government has also set out a comprehensive strategy for reinvigorating demand in the rural economy, enhancing the economy’s social and physical infrastructure, and improving the environment for doing business and deepening institutional reform. The implementation of these measures should improve supply conditions and allow efficiency and productivity gains to accrue," the RBI has said. This is very much needed given the stress experienced in the rural economy. "Consumer non-durables production has been shrinking, with a pronounced decline in Q4. This reflects the continuing slack in rural demand. On the other hand, consumer durables remained strong, even after abstracting from favourable base effects, which suggests that urban demand is holding up," the RBI says in the statement. Clearly, rural and urban economies are on divergent paths.
My Opinion Is as follows
danendra jain
Role Of Interest Rate In Credit Growth
As usual, present Finance Minister also want interest rates to come down and for this, he as his predecessor Finance Minister want RBI Governor to reduce interest rate. Public perception is already clear that RBI Governor is not in tune with ideas of Finance Minister on the issue of interest rate , whether it should come down or remain stable or be allowed to go up to some extent. Our learned FM Mr. Jaitely thinks that slump in manufacturing sector is mainly due to high interest rate. He says cost of capital is one singular factor which has contributed to slowdown of manufacturing growth.
On the contrary , our RBI Governor Mr. R. Rajan thinks that interest rate cannot dance as per sweet will of the government but can go up or come down as per economic scene, inflationary pressure, national priorities and other financial inputs. Normally politicians do not want to understand economics of the financial matters of the country and economists do not like to understand the politics of vote bank. But it is always the best when both understand the reality of the financial and political issues in the larger interest of the common men as also that of business enterprises.
In my opinion Finance Minister in Modi Government Mr. Arun Jaitley and all who are protagonists of his line of thought are mistaken and on wrong footing. Cost of interest in total cost of manufacturing is insignificant. Even when interest rate used to be much higher during seventies and eighties, growth in manufacturing used to be much better than what it remained during low-interest regime. And it is ironical that even during the period of post liberalisation and post reformation , when RBI forced drastic reduction in interest rate charged by banks, the growth in manufacturing sector was almost negligible . It is important to say here that a business man decides to do any business only when there is possibility of higher profit and it is undeniably true that profit percentage is not diluted by one or two per cent rise in interest rate charged by banks on amount of loan availed from bank.
Credit growth target achieved by banks during last few years was not due to credit delivery for manufacturing sector or by delivery of credit to priority and neglected sector . Credit growth even in farm as well as export sector achieved during last ten years of UPA rule was also not sufficient and good to desirable extent although interest charged for farmers and exporters use to be much lower than charged on any other sector. As such it is not wise and proper to imagine that only low interest regime will help in growth in manufacturing sector. It is unfortunate that despite low interest rate charged by banks on export finance, trade deficit grew continuously during last ten years of UPA rule. Import grew without any break . Gold import touched its peak disturbing trade balance. But growth in manufacturing was dismal and negative in many sectors due to many other hurdles in such activities.
When imported goods are cheaper and easily available in market , none of business men will attempt to manufacture goods in India. When trading of goods yields good return on capital , why one will go for investment in manufacturing activity .Hundreds and thousands of business entrepreneurs in India are such who have got industrial land allotted for the purpose of manufacturing a product by submitting a project to District Industry Centre, got sanction for coal linkages and bought minerals from mines at cheaper rate . But they avoided real manufacturing of goods because they found it more profitable to sell scarce commodities like coal, fuel, minerals, land to others at higher rate.
When profits can be earned without doing business, that is only by cheating government departments, why one will opt for taking the pain of manufacturing. When subsidies are distributed by government only by planning a project, why one will go for real execution of project as per plan submitted to GOI or various departments of State governments. When Self Help Groups and Non Government Organisations are getting aids without doing real business, how real income and real employment will be generated in our country is a million dollar question.
Credit growth in manufacturing sector has been poor due to several other reasons which play vital role in credit delivery . High rate of interest cannot be considered as reason behind Low credit growth .Contribution of interest in overall expenses of a company is very low and then further rise of one or two per cent in interest rate on loans will have totally insignificant role in balance sheet of any company. Rather it will be far far better and desirable that government of India decides national priorities, assess cost of deposits for banks and then fixes rate of interest for each useful sectors . Such uniform rates will be uniformly applied by each banks throughout the country. This used to happen after nationalisation of banks .
During reformation era from 1991 to 2014 public sector banks have caused loss to each other by competing with each other in credit growth. To achieve the target , various PS banks indulged in bribe based lending sacrificing quality of lending and thus contributing in growth of Non performing assets .. GOI can avoid such competition among PS banks by imposing uniform interest rate structure for lending. After all , the purpose of any prudent government is to increase manufacturing, to increase job opportunities and to produce goods and services at cheaper and affordable rate and not to create competition among banks of the same government and not all to earn profit. The purpose of the government should to be to make the loan available to really needy persons comfortably and in shortest period of time and hassle free .The purpose of the GOI or that of at least public sector banks is not to earn profit but to serve common men who are starving due to high price and due to rampant corruption in all offices including banks.
But in the era of liberalisation , banks have been given freedom to decide rate structure . Unfortunately this freedom has been used to damage banks by bankers in nexus with politicians, businessmen and corporate houses. It is open secret that base rate is decided by Chief of majority of banks not based on various ingredients and inputs prescribed by RBI but decided and altered as per whims and fancies of political bosses.
Interest concessions are more often than not ,given to rich borrowers not based on national priority or health of industry or bank's benefit of business but based on relation of bank officials with promoters of business. Various gifts and cash incentives to bank officials also play key role in such concession. The most painful part is that industries which enjoy lowest rate of interest and which enjoy maximum concessions fail quicker than those industries which are charged higher interest rates.
I may say with full confidence that ninety five per cent of stressed assets in bank or non performing assets in banks is not due to charging of higher interest rate by bank on loan availed by the borrower. A good and successful business man never considers interest rate as a hurdle in growth. Business men who are expert in doing business do not depend solely on banks for loan , they freely and frequently avail finance from private lenders at much higher rate. They do business and do business only .There are many such corporate houses and public sector undertakings which are having hundreds and thousand of crores of rupees as idle fund which they are unable to invest in manufacturing due to several hurdles, delay in getting statutory clearances, unavailability of coal, fuel, minerals and due to several local hurdles. NPA rises due to failure of promoters in doing business in proper way, due to lack of capital or diversion of fund, loss of money in bribing officials etc
Then the question arises why people are not going for manufacturing or not interested in doing business. To make it clear we will have to understand what are the factors which may spoil future of a business or which may stop businessman opting for manufacturing. Government should make an analysis on key reasons why business fails, why business men avoid manufacturing and why there is price rise of all goods. It is never interest rate which causes disincentive to business men. Banks are advocating low interest rate for credit growth.
I would like to ask clever and wise bankers to say how much share of stressed assets in their banks is due to charging of higher interest rate. I think they will not honestly admit that in 95% of stressed assets or fall in credit to manufacturing sector , reason is other than rate of interest.
Can they give a guarantee that if interest rate is reduced or even made to zero , they will give unprecedented credit growth in all the years to come without improving other extraneous factors which are greater impediments in growth of credit. No They cannot, I am sure. When Interest rate will be reduced , these clever bankers will put blame on global recession, economic slowdown, political environment etc to save their evil deeds.
There may be following reasons for failure of business or for not starting a new business.
Lack of experience , improper management, lack of vision , selling of goods on credit to earn higher profit margin, defrauded by mischievous and fraudulent staff etc
Insufficient capital (money) , or misuse of capital , unplanned expansion of business
Poor location , poor infrastructure needing higher cost on transportation ,
Poor inventory management
Over-investment in fixed assets
Poor credit arrangement management , delay in bank finance, under finance by bank , excessive finance from bank,
Personal use of business funds , huge expenses and huge withdrawal of fund from business by promoters for benefit of self and own family
Unexpected growth , diversification of fund to other business without proper planning
Competition , failure to change strategy of doing business when business environment changes, when liking of consumer changes , when other substitute product is introduced in market, when cheaper product with better quality comes in market etc.
Low Sales. It may be due to tough competition or even due to monopolistic business. Promoters ambitious of earning profit at exorbitantly higher rate , quality of goods being inferior ,price higher than other branded goods, poor selling arrangements, pilferage of money by staff, goods sold on credit not getting paid, inputs are not available, rise in cost of inputs required for manufacturing etc
Political interference in all matters related to business including appointment of staff, their salary ,leaves , transfers etc
Disturbance by local mafia, naxalite elements and anti social elements. A Business man has to pay bribe or donation or Dadagiri fees to local mafias to survive in an area and to do business without facing any local disturbance. Police personnel are normally agents of local mafias and musclemen or absolutely indifferent to grievance of business men and hence there is always fear of doing business .
Money extortion by government officials, tax men and local muscle men . Business men are tortured by government officials. Every now and then they have to give money to inspectors, auditors, police men , mafias , politicians etc to remain in business.
poor quality of man power, wage load of labour going higher due to price rise. Cost of natural resources like coal, fuel, minerals , land etc have gone sharply up during last ten years of UPA rule where majority of natural resources have ben given to private business houses who are charging exorbitant rates on each such items. One acre of land which used to be available at Rs.one lac ten years ago is not available now even at Rs. one crore. Cost of house or rent of a house used to be lower upto 1990 and after 1991 cost has gone up even upto hundred time. There is no control on earning made by builders.Rate of coal and fuel used to be nominal and government used to sell these items on cost basis . But in the era of liberalisation cost of all these inputs have gone up multifold. Similarly cost of iron, copper, cement, sand, transportation etc all have gone up many fold during last ten years. A few hundred of Corporate houses and business men have become owner of billions and billions of rupees whereas 125 crore or Indians are subjected to pain of price rise . When price goes up for all commodities of general use, purchase capacity of people shrinks and hence demand do not rise.
Five Reasons 8 Out Of 10 Businesses Fail
Inability to nail a profitable business model with proven revenue streams.
Leadership breakdown at the top
Failure to communicate value propositions in clear, concise and compelling fashion.
No real differentiation in the market
Not really in touch with customers through deep dialogue.
I therefore feel that
First and foremost reason is that, previous government used banks to lend money for growth of infrastructure, for electricity distribution agencies and for power generation, for Big retail mart ,for jewel export business, for real estate sector etc which do not help in growth of manufacturing. More than fifty per cent of incremental growth in credit achieved by public sector banks during last ten years was due to finance made for infrastructure, for housing and for other retail loans. Credit growth in manufacturing sector was not a choice of bankers . Though after nationalisation of banks, GOI before liberal era, had decided priority sector for banks for lending, banks in general avoided lending under priority sector ,They achieved target of priority sector either by manipulation of data or though tit better not to achieve the target and deposit money in Government accounts or in mutual fund or park money at low rate with GOI to compensate for gap in target and actual in priority sector lending.
Public sector banks totally neglected manufacturing sector. Banks used to give loans to only those business men who could please bosses of banks. Loan processing for honest business men and sincere industrialists is so much cumber some that loan seekers think it better to avail loan facility either fro private banks or from other private money lenders.
Other reason for lesser growth in manufacturing is several hurdles in setting up an industry. There are several hurdle in setting up an industry and these are like getting clearance from pollution board, getting license fro competent authority, fear of sales tax and service tax officials, fear of income tax officials, fear of local mafias, anti-social elements, labour problems etc . Person desirous of setting up an industry has to face problem of getting power connection , getting land at suitable place, procuring coal and other minerals etc.
Cost of power, cost of coal and other fuels , cost of labour, burden of tax. Cost of all relevent input have gone sharply up due to rise in cost of coal, land and other natural inputs. Unemployed unskilled labour were engaged in unproductive schemes under MANREGA scheme .
Share of labour cost, power cost, fuel cost, input raw material cost all have gone sharply up and as compared to these expenses , burden of interest in total manufacturing cost for an industry is hardly a few percentage in total cost and one say that interest cost caused by one or two percent rise in rate of interest charged to such loans compared to cost of other input is negligible. As such demand for low interest rate to facilitate credit growth is false, baseless and improper .
On the contrary , if banks decide to reduce interest rates on loans they sanction, they will have to reduce interest rate on deposits they accept from public. Due to such fall in interest rate on deposits, people who have surplus income think it better to invest in other savings schemes, gold, land or other unproductive items. If banks do not e enough deposits, their capacity to lend also get reduced.
Obstacles in doing business or in manufacturing are many in addition to what has been said above. I recapitulate some of them hereunder.
Government policy and procedures: Government policy and procedures in India are among the most complex, confusing and cumbersome in the world. Even after the much publicised liberalisation, they do not present a very conducive situation. One prerequisite for success in globalisation is swift and efficient action. Government policy and the bureaucratic culture in India in this respect are not that encouraging.
High Cost: High cost of many vital inputs and other factors like raw materials and intermediates, power, finance infrastructural facilities like port etc., tend to reduce the international competitiveness of the Indian Business.
Poor Infrastructure: Infrastructure in India is generally inadequate and inefficient and therefore very costly. This is a serious problem affecting the growth as well as competitiveness.
Obsolescence: The technology employed, mode and style of operations etc., are, in general, obsolete and these seriously affect the competitiveness.
Resistance to Change: There are several socio-political factors which resist change and this comes in the way of modernisation, rationalisation and efficiency improvement. Technological modernisation is resisted due to fear of unemployment. The extent of excess labour employed by the Indian industry is alarming. Because of this labour productivity is very low and this in some cases more than offsets the advantages of cheap labour.
Poor Quality Image: Due to various reasons, the quality of many India products is poor. Even when the quality is good, the poor quality image India has becomes a handicap.
Supply Problems: Due to various reasons like low production capacity, shortages of raw materials and infrastructures like power and port facilities, Indian companies in many instances are not able to accept large orders or to keep up delivery schedules.
Small Size: Because of the small size and the low level of resources, in many cases Indian firms are not able to compete with the giants of other countries. Even the largest of the Indian companies are small compared to the multinational giants.
Lack of Experience: The general lack of experience in managing international business is another important problem.
Limited R&D and Marketing Research: Marketing Research and R&D in other areas are vital inputs of development of international business. However, these are poor in Indian Business. Expenditure on R&D in India is less than one per cent of GNP while it is two to three per cent in most of the developed countries.
Growing Competition: The competition is growing not only from the firs in the developed countries but also from the developing country firms. Indeed, the growing competition from the developing country firms is a serious challenge to India’s international business.
Trade Barriers: Although the tariff barriers to trade have been progressively reduced thanks to the GATT/WTO, the non-tariff barriers have been increasing, particularly in the developed countries. Further, the trading blocs like the NAFTA, EC etc., could also adversely affect India’s business.
Factors Favouring Globalisation
Human Resources: Apart from the low cost of labour, there are several other aspects of human resources to India’s favour. India has one of the largest pool of scientific and technical manpower. The number of management graduates is also surging. It is widely recognised that given the right environment, Indian scientists and technical personnel can do excellently. Similarly, although the labour productivity in India is generally low, given the right environment it will be good. While several countries are facing labour shortage and may face diminishing labour supply, India presents the opposite picture. Cheap labour has particular attraction for several industries.
Wide Base: India has a very broad resource and industrial base which can support a variety of business.
Growing Entrepreneurship: Many of the established industries are planning to go international in a big way. Added to this is the considerable growth or new and dynamic entrepreneurs who could make a significant contribution to the globalisation of Indian business.
Growing Domestic Market: The growing domestic market enables the Indian companies to consolidate their position and to gain more strength to make foray into the foreign market or to expand their foreign business.
Niche Markets: There are many marketing opportunities abroad present in the form of market niches.
Expanding Markets: The growing population and disposable income and the resultant expanding internal market provides enormous business opportunities.
Transnationalisation of World Economy: Transnationalisation of the world economy. i.e., the integration of the national economies into a single world economy as evinced by the growing interdependence and globalisation of markets is an external factor encouraging globalisation of India Business.
NRIs: The large number of non-resident Indians who are resourceful – in terms of capital, skill, experience, exposure, ideas etc.– is an assed which can contribute to the globalisation of Indian Business. The contribution of the overseas Chinese to the recent impressive industrial development of China may be noted here.
Economic Liberalisation: The economic liberalisation in India is an encouraging factor of globalisation. The delicensing of industries, removal of restrictions on growth, opening up of industries earlier reserved for the public sector, import liberalisations, liberalisation of policy towards foreign capital and technology etc., could encourage globalisation of Indian Business but has adversely affected domestic business.
Competition: The growing competition, both from within the country and abroad, provokes many Indian companies to look to foreign markets seriously to improve their competitive position and to increase the business.
In my opinion Finance Minister in Modi Government Mr. Arun Jaitley and all who are protagonists of his line of thought are mistaken and on wrong footing. Cost of interest in total cost of manufacturing is insignificant. Even when interest rate used to be much higher during seventies and eighties, growth in manufacturing used to be much better than what it remained during low-interest regime. And it is ironical that even during the period of post liberalisation and post reformation , when RBI forced drastic reduction in interest rate charged by banks, the growth in manufacturing sector was almost negligible . It is important to say here that a business man decides to do any business only when there is possibility of higher profit and it is undeniably true that profit percentage is not diluted by one or two per cent rise in interest rate charged by banks on amount of loan availed from bank.
Credit growth target achieved by banks during last few years was not due to credit delivery for manufacturing sector or by delivery of credit to priority and neglected sector . Credit growth even in farm as well as export sector achieved during last ten years of UPA rule was also not sufficient and good to desirable extent although interest charged for farmers and exporters use to be much lower than charged on any other sector. As such it is not wise and proper to imagine that only low interest regime will help in growth in manufacturing sector. It is unfortunate that despite low interest rate charged by banks on export finance, trade deficit grew continuously during last ten years of UPA rule. Import grew without any break . Gold import touched its peak disturbing trade balance. But growth in manufacturing was dismal and negative in many sectors due to many other hurdles in such activities.
When imported goods are cheaper and easily available in market , none of business men will attempt to manufacture goods in India. When trading of goods yields good return on capital , why one will go for investment in manufacturing activity .Hundreds and thousands of business entrepreneurs in India are such who have got industrial land allotted for the purpose of manufacturing a product by submitting a project to District Industry Centre, got sanction for coal linkages and bought minerals from mines at cheaper rate . But they avoided real manufacturing of goods because they found it more profitable to sell scarce commodities like coal, fuel, minerals, land to others at higher rate.
When profits can be earned without doing business, that is only by cheating government departments, why one will opt for taking the pain of manufacturing. When subsidies are distributed by government only by planning a project, why one will go for real execution of project as per plan submitted to GOI or various departments of State governments. When Self Help Groups and Non Government Organisations are getting aids without doing real business, how real income and real employment will be generated in our country is a million dollar question.
Credit growth in manufacturing sector has been poor due to several other reasons which play vital role in credit delivery . High rate of interest cannot be considered as reason behind Low credit growth .Contribution of interest in overall expenses of a company is very low and then further rise of one or two per cent in interest rate on loans will have totally insignificant role in balance sheet of any company. Rather it will be far far better and desirable that government of India decides national priorities, assess cost of deposits for banks and then fixes rate of interest for each useful sectors . Such uniform rates will be uniformly applied by each banks throughout the country. This used to happen after nationalisation of banks .
During reformation era from 1991 to 2014 public sector banks have caused loss to each other by competing with each other in credit growth. To achieve the target , various PS banks indulged in bribe based lending sacrificing quality of lending and thus contributing in growth of Non performing assets .. GOI can avoid such competition among PS banks by imposing uniform interest rate structure for lending. After all , the purpose of any prudent government is to increase manufacturing, to increase job opportunities and to produce goods and services at cheaper and affordable rate and not to create competition among banks of the same government and not all to earn profit. The purpose of the government should to be to make the loan available to really needy persons comfortably and in shortest period of time and hassle free .The purpose of the GOI or that of at least public sector banks is not to earn profit but to serve common men who are starving due to high price and due to rampant corruption in all offices including banks.
But in the era of liberalisation , banks have been given freedom to decide rate structure . Unfortunately this freedom has been used to damage banks by bankers in nexus with politicians, businessmen and corporate houses. It is open secret that base rate is decided by Chief of majority of banks not based on various ingredients and inputs prescribed by RBI but decided and altered as per whims and fancies of political bosses.
Interest concessions are more often than not ,given to rich borrowers not based on national priority or health of industry or bank's benefit of business but based on relation of bank officials with promoters of business. Various gifts and cash incentives to bank officials also play key role in such concession. The most painful part is that industries which enjoy lowest rate of interest and which enjoy maximum concessions fail quicker than those industries which are charged higher interest rates.
I may say with full confidence that ninety five per cent of stressed assets in bank or non performing assets in banks is not due to charging of higher interest rate by bank on loan availed by the borrower. A good and successful business man never considers interest rate as a hurdle in growth. Business men who are expert in doing business do not depend solely on banks for loan , they freely and frequently avail finance from private lenders at much higher rate. They do business and do business only .There are many such corporate houses and public sector undertakings which are having hundreds and thousand of crores of rupees as idle fund which they are unable to invest in manufacturing due to several hurdles, delay in getting statutory clearances, unavailability of coal, fuel, minerals and due to several local hurdles. NPA rises due to failure of promoters in doing business in proper way, due to lack of capital or diversion of fund, loss of money in bribing officials etc
Then the question arises why people are not going for manufacturing or not interested in doing business. To make it clear we will have to understand what are the factors which may spoil future of a business or which may stop businessman opting for manufacturing. Government should make an analysis on key reasons why business fails, why business men avoid manufacturing and why there is price rise of all goods. It is never interest rate which causes disincentive to business men. Banks are advocating low interest rate for credit growth.
I would like to ask clever and wise bankers to say how much share of stressed assets in their banks is due to charging of higher interest rate. I think they will not honestly admit that in 95% of stressed assets or fall in credit to manufacturing sector , reason is other than rate of interest.
Can they give a guarantee that if interest rate is reduced or even made to zero , they will give unprecedented credit growth in all the years to come without improving other extraneous factors which are greater impediments in growth of credit. No They cannot, I am sure. When Interest rate will be reduced , these clever bankers will put blame on global recession, economic slowdown, political environment etc to save their evil deeds.
There may be following reasons for failure of business or for not starting a new business.
Lack of experience , improper management, lack of vision , selling of goods on credit to earn higher profit margin, defrauded by mischievous and fraudulent staff etc
Insufficient capital (money) , or misuse of capital , unplanned expansion of business
Poor location , poor infrastructure needing higher cost on transportation ,
Poor inventory management
Over-investment in fixed assets
Poor credit arrangement management , delay in bank finance, under finance by bank , excessive finance from bank,
Personal use of business funds , huge expenses and huge withdrawal of fund from business by promoters for benefit of self and own family
Unexpected growth , diversification of fund to other business without proper planning
Competition , failure to change strategy of doing business when business environment changes, when liking of consumer changes , when other substitute product is introduced in market, when cheaper product with better quality comes in market etc.
Low Sales. It may be due to tough competition or even due to monopolistic business. Promoters ambitious of earning profit at exorbitantly higher rate , quality of goods being inferior ,price higher than other branded goods, poor selling arrangements, pilferage of money by staff, goods sold on credit not getting paid, inputs are not available, rise in cost of inputs required for manufacturing etc
Political interference in all matters related to business including appointment of staff, their salary ,leaves , transfers etc
Disturbance by local mafia, naxalite elements and anti social elements. A Business man has to pay bribe or donation or Dadagiri fees to local mafias to survive in an area and to do business without facing any local disturbance. Police personnel are normally agents of local mafias and musclemen or absolutely indifferent to grievance of business men and hence there is always fear of doing business .
Money extortion by government officials, tax men and local muscle men . Business men are tortured by government officials. Every now and then they have to give money to inspectors, auditors, police men , mafias , politicians etc to remain in business.
poor quality of man power, wage load of labour going higher due to price rise. Cost of natural resources like coal, fuel, minerals , land etc have gone sharply up during last ten years of UPA rule where majority of natural resources have ben given to private business houses who are charging exorbitant rates on each such items. One acre of land which used to be available at Rs.one lac ten years ago is not available now even at Rs. one crore. Cost of house or rent of a house used to be lower upto 1990 and after 1991 cost has gone up even upto hundred time. There is no control on earning made by builders.Rate of coal and fuel used to be nominal and government used to sell these items on cost basis . But in the era of liberalisation cost of all these inputs have gone up multifold. Similarly cost of iron, copper, cement, sand, transportation etc all have gone up many fold during last ten years. A few hundred of Corporate houses and business men have become owner of billions and billions of rupees whereas 125 crore or Indians are subjected to pain of price rise . When price goes up for all commodities of general use, purchase capacity of people shrinks and hence demand do not rise.
Five Reasons 8 Out Of 10 Businesses Fail
Inability to nail a profitable business model with proven revenue streams.
Leadership breakdown at the top
Failure to communicate value propositions in clear, concise and compelling fashion.
No real differentiation in the market
Not really in touch with customers through deep dialogue.
I therefore feel that
First and foremost reason is that, previous government used banks to lend money for growth of infrastructure, for electricity distribution agencies and for power generation, for Big retail mart ,for jewel export business, for real estate sector etc which do not help in growth of manufacturing. More than fifty per cent of incremental growth in credit achieved by public sector banks during last ten years was due to finance made for infrastructure, for housing and for other retail loans. Credit growth in manufacturing sector was not a choice of bankers . Though after nationalisation of banks, GOI before liberal era, had decided priority sector for banks for lending, banks in general avoided lending under priority sector ,They achieved target of priority sector either by manipulation of data or though tit better not to achieve the target and deposit money in Government accounts or in mutual fund or park money at low rate with GOI to compensate for gap in target and actual in priority sector lending.
Public sector banks totally neglected manufacturing sector. Banks used to give loans to only those business men who could please bosses of banks. Loan processing for honest business men and sincere industrialists is so much cumber some that loan seekers think it better to avail loan facility either fro private banks or from other private money lenders.
Other reason for lesser growth in manufacturing is several hurdles in setting up an industry. There are several hurdle in setting up an industry and these are like getting clearance from pollution board, getting license fro competent authority, fear of sales tax and service tax officials, fear of income tax officials, fear of local mafias, anti-social elements, labour problems etc . Person desirous of setting up an industry has to face problem of getting power connection , getting land at suitable place, procuring coal and other minerals etc.
Cost of power, cost of coal and other fuels , cost of labour, burden of tax. Cost of all relevent input have gone sharply up due to rise in cost of coal, land and other natural inputs. Unemployed unskilled labour were engaged in unproductive schemes under MANREGA scheme .
Share of labour cost, power cost, fuel cost, input raw material cost all have gone sharply up and as compared to these expenses , burden of interest in total manufacturing cost for an industry is hardly a few percentage in total cost and one say that interest cost caused by one or two percent rise in rate of interest charged to such loans compared to cost of other input is negligible. As such demand for low interest rate to facilitate credit growth is false, baseless and improper .
On the contrary , if banks decide to reduce interest rates on loans they sanction, they will have to reduce interest rate on deposits they accept from public. Due to such fall in interest rate on deposits, people who have surplus income think it better to invest in other savings schemes, gold, land or other unproductive items. If banks do not e enough deposits, their capacity to lend also get reduced.
Obstacles in doing business or in manufacturing are many in addition to what has been said above. I recapitulate some of them hereunder.
Government policy and procedures: Government policy and procedures in India are among the most complex, confusing and cumbersome in the world. Even after the much publicised liberalisation, they do not present a very conducive situation. One prerequisite for success in globalisation is swift and efficient action. Government policy and the bureaucratic culture in India in this respect are not that encouraging.
High Cost: High cost of many vital inputs and other factors like raw materials and intermediates, power, finance infrastructural facilities like port etc., tend to reduce the international competitiveness of the Indian Business.
Poor Infrastructure: Infrastructure in India is generally inadequate and inefficient and therefore very costly. This is a serious problem affecting the growth as well as competitiveness.
Obsolescence: The technology employed, mode and style of operations etc., are, in general, obsolete and these seriously affect the competitiveness.
Resistance to Change: There are several socio-political factors which resist change and this comes in the way of modernisation, rationalisation and efficiency improvement. Technological modernisation is resisted due to fear of unemployment. The extent of excess labour employed by the Indian industry is alarming. Because of this labour productivity is very low and this in some cases more than offsets the advantages of cheap labour.
Poor Quality Image: Due to various reasons, the quality of many India products is poor. Even when the quality is good, the poor quality image India has becomes a handicap.
Supply Problems: Due to various reasons like low production capacity, shortages of raw materials and infrastructures like power and port facilities, Indian companies in many instances are not able to accept large orders or to keep up delivery schedules.
Small Size: Because of the small size and the low level of resources, in many cases Indian firms are not able to compete with the giants of other countries. Even the largest of the Indian companies are small compared to the multinational giants.
Lack of Experience: The general lack of experience in managing international business is another important problem.
Limited R&D and Marketing Research: Marketing Research and R&D in other areas are vital inputs of development of international business. However, these are poor in Indian Business. Expenditure on R&D in India is less than one per cent of GNP while it is two to three per cent in most of the developed countries.
Growing Competition: The competition is growing not only from the firs in the developed countries but also from the developing country firms. Indeed, the growing competition from the developing country firms is a serious challenge to India’s international business.
Trade Barriers: Although the tariff barriers to trade have been progressively reduced thanks to the GATT/WTO, the non-tariff barriers have been increasing, particularly in the developed countries. Further, the trading blocs like the NAFTA, EC etc., could also adversely affect India’s business.
Factors Favouring Globalisation
Human Resources: Apart from the low cost of labour, there are several other aspects of human resources to India’s favour. India has one of the largest pool of scientific and technical manpower. The number of management graduates is also surging. It is widely recognised that given the right environment, Indian scientists and technical personnel can do excellently. Similarly, although the labour productivity in India is generally low, given the right environment it will be good. While several countries are facing labour shortage and may face diminishing labour supply, India presents the opposite picture. Cheap labour has particular attraction for several industries.
Wide Base: India has a very broad resource and industrial base which can support a variety of business.
Growing Entrepreneurship: Many of the established industries are planning to go international in a big way. Added to this is the considerable growth or new and dynamic entrepreneurs who could make a significant contribution to the globalisation of Indian business.
Growing Domestic Market: The growing domestic market enables the Indian companies to consolidate their position and to gain more strength to make foray into the foreign market or to expand their foreign business.
Niche Markets: There are many marketing opportunities abroad present in the form of market niches.
Expanding Markets: The growing population and disposable income and the resultant expanding internal market provides enormous business opportunities.
Transnationalisation of World Economy: Transnationalisation of the world economy. i.e., the integration of the national economies into a single world economy as evinced by the growing interdependence and globalisation of markets is an external factor encouraging globalisation of India Business.
NRIs: The large number of non-resident Indians who are resourceful – in terms of capital, skill, experience, exposure, ideas etc.– is an assed which can contribute to the globalisation of Indian Business. The contribution of the overseas Chinese to the recent impressive industrial development of China may be noted here.
Economic Liberalisation: The economic liberalisation in India is an encouraging factor of globalisation. The delicensing of industries, removal of restrictions on growth, opening up of industries earlier reserved for the public sector, import liberalisations, liberalisation of policy towards foreign capital and technology etc., could encourage globalisation of Indian Business but has adversely affected domestic business.
Competition: The growing competition, both from within the country and abroad, provokes many Indian companies to look to foreign markets seriously to improve their competitive position and to increase the business.
provision of adequate infrasructure facilities like power .road water is the main deciding factor in growth of manufacturing sector.
ReplyDeleteAlso with introduction of MCLR, long term loans like PPP may be difficult.The system demands matching of assets and liabilities.This will be fifficult now.
We may wait and see the operations of scheme.
provision of adequate infrasructure facilities like power .road water is the main deciding factor in growth of manufacturing sector.
ReplyDeleteAlso with introduction of MCLR, long term loans like PPP may be difficult.The system demands matching of assets and liabilities.This will be fifficult now.
We may wait and see the operations of scheme.