tag:blogger.com,1999:blog-8541474529241719206.post8667622664307392940..comments2023-06-01T16:59:26.599+05:30Comments on Ila Patnaik's Blog: Policy easing won't lift investmentUnknownnoreply@blogger.comBlogger2125tag:blogger.com,1999:blog-8541474529241719206.post-22975407779135671232012-10-27T18:33:26.132+05:302012-10-27T18:33:26.132+05:30Actually, it works the other way. At high lending ...Actually, it works the other way. At high lending rates and deposit rates kept down, banks prefer to lend to larger companies rather than SMEs. Of course the banks PSU culture also has a lot to do with it. This has been the experience dealing with Indian banks, including ICICI etc. but must say that it has been changing slowly last few years.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8541474529241719206.post-14123270290973369762012-10-25T15:54:10.009+05:302012-10-25T15:54:10.009+05:30Mostly people do make the low-interest rate hurt s...Mostly people do make the low-interest rate hurt saving argument (correctly so) but I usually don't see the following argument.<br /><br />In a low interest rate scenario, lower yielding large borrowings backed by reputed corporates get access to financing more easily than new ventures. This means, irrational mega-projects or mal-investments of large corporates get financed at the cost of genuine investments of new ventures. <br /><br />Typically, such irrational mega-projects consume a lot of credit requiring load syndication. This has twin benefits for bankers. First, there is a higher degree of comfort in being with the herd. Secondly, bankers do not have to go through credit appraisal of many small entities of questionable risk profile. This makes them assign a lower risk to these projects than appropriate. Intelligent investors will find that this contradicts with the "diversification as risk management" strategy. But being with herd has a stronger lure and is treated as risk mitigation (though wrongly).<br /><br />Further, at lower interest rates, debt starts being used as an instrument to amplify equity returns. <br /><br />Thus the second blow to new ventures comes from crowding out. It implies that even in a low interest rate environment, small businesses and entrepreneurs may not have access to lower cost capital. Therefore this impacts the long-term strength of the economy. <br /><br />In high interest rate scenario, the irrational mega-projects seem less promising. Hence, contrary to popular belief, it may be easier for smaller businesses to compete in high interest rate scenarios. Rahul Deodharhttps://www.blogger.com/profile/13354874480198485819noreply@blogger.com