Debt's respectability

With the lever of growth ,the GDP, shortened from 9 % to 5 % the nation's effective economic lift  gets   reduced.The loan market will be the  first sufferer as returns from business would not be able to fully cover loan repayments. Lending institutions ,by their very nature of business are risk prone.No loan can ever be considered absolutely risk free and   today the NPAs, an euphemism for bad debt, seem to form a major chunk..But  traditionally,debt had  been abhorred by  society ,including bankers !. The 19 th century bankers were circumspect and  matched the value of their deposits with their own capital even up to  a 50/50 basis for a near total equity cushion, that was reduced next to nothing as banks  became limited liability companies .They were now free to  assume far greater risk even as they took on more debt to boost their returns. Both risk and reward, exploded in tandem.Modern capitalism then dared to be  more  permissive as banks were  allowed to deduct their interest payments from their tax liabilities .Endless and  unholy  subsidies as these egged on  financial risk-taking. The  Basel framework,assigns a risk weight of zero to government debt of developed countries . That meant that with  hardly any capital, major banks could hold unlimited amounts of the sovereign debt of such nations and yet pass the credit test.The rules that allowed Greek sovereign debt , facing a scandalous 70% loss on the face value, to carry zero credit risk is a travesty .  Both risks and returns have soared under a blue print of western capitalism..But whereas  the risks have  been borne by wider society , the returns  go to  bank shareholders and managers .Debt,once a societal stigma but  today's major  lever of growth, stands  elevated to respectability .
   ( Published Fin Exp Nov 28 )


 http://epaper.financialexpress.com/190853/Indian-Express/28-November-2013#page/6/2