Question

Under flexible inflation targetting regime, is the current account deficit a good sign? What is the effect of delaying corporate sector defaults by ensuring some state owned banks to implement credit restructing schemes with low interest rates. Also debt structure of medium and large sized is important ?

Answer 1

A current account deficit means that the consumption of cheap imports is healthy, as compared to the the goods produced by domestic manufacturers. So, the consumption in the economy is pretty good. In a flexible inflation targeting regime, the central bank is able to maintain the price level at a certain range. The domestic manufacturers are at a loss despite surge in consumption Hence increased consumption (current account deficit) in the market is a negative sign for the economy.

A lot of corporate defaulters are unable to payback the loans due to unprecedented losses in their businesses. By delaying the default payments, it gives them a breathing time to raise the money to be paid in a restructured credit system. Meanwhile, in a bank's point of view, those are just BAD loans therefore the bank is at a loss in this case. More the delay, more losses incurred to the bank. The interest paid by the corporates hold a major share of revenue to these banks, and when that's delayed and on top of it being reduced, the banks slowly become worse off (refer to Yes bank in India). And when these state owned banks are at a loss, the government is at loss. To curb this they will launch bank mergers, increase taxes, etc.

I didn't quite get the question on debt structure but I'll give you an idea. A debt structure refers to the duration and time of interest payments. So it is important that a firm knows its payment schedule to not fall under the defaulters list and face the neccessary repercussions.

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