Corporate chieftains at the just-concluded World Economic Forum’s Indian Economic Summit in New Delhi used their considerable leverage to convey the impression that the government and the Reserve Bank of India are not doing enough or moving quickly enough to address the seizure in credit markets, particularly the lack of availability of bank credit. Whether it is suppliers’ credit, trade finance, working capital from banks or external borrowings, the rising demand for credit from commerce and industry is simply not being met, say the chief executives of India Inc. The finance minister, P. Chidambaram, suggested the normal adjustment process of a slowdown, whereby companies reduce prices until consumption begins to pick up again. He also said that India Inc. should bite the bullet and cut prices, rather than cut production or lay off employees. But the chief executives argued vehemently that they had been doing just that for months; it was the government, they said, that had to provide the necessary push to ensure adequate liquidity, ample credit delivery and a reasonable interest rate.

The RBI has responded to the liquidity crunch by undertaking a series of measures, starting mid-September this year. It raised interest rates on non-resident Indian deposits substantially, eased the restrictions on tenor, size and price for external commercial borrowings, substantially cut reserve requirements for banks (both the statutory liquidity ratio and the cash reserve ratio), and even allowed banks to lend to mutual funds. The central bank also eased lending norms for specific sectors — real estate, exporters, and small and medium enterprises — while the government released funds from the farm-loan waiver to banks, in addition to fresh capital infusions into several banks. Finally, the central bank also allowed a dollar swap line: in other words, opened a dollar line of credit for companies. What is astonishing about these measures, apart from their breadth, is the speed at which they were undertaken. And, of course, the government announced its willingness to do what it takes to get the economic engine up and running again. But will all this prove to be enough to get credit flowing again? Perhaps not.

For it is not liquidity that matters, but leverage, making bankers look at risk differently in current conditions. First, they have begun to assess industrial and business houses on a consolidated basis, rather than as individual companies within the group. Second, to the total debt, they also add the credit equivalent of all off-balance-sheet liabilities of the entire group. Third, banks take into account whether promoters have used their own equity as collateral — as they have in many cases. Several groups have been found to have leverage ratios of seven times net worth, if not more; prudence requires that leverage be kept below two times net worth. De-leveraging applies not just to American and European companies. And no policy or government action can deal with that.