Welcome to the 143rd edition of The Pattern, a weekly where we dive into the latest from the world of economy, finance, and technology. Let’s get started.

These are testing times. Not just for the economy and the stock market watchers, but for banks and NBFCs supporting the plumbing of the economy too. This is more than just the rupee falling against the dollar. What started as a weak domestic economy now looks like a comprehensive slowdown.

First, there’s weak consumption data, which portrays a grim picture of the economy. Households are struggling to save or spend. At the same time, businesses face the crunch of reduced demand, reflected in thinner bottom lines. The government tried to do its bit by cooling off income tax outlay for individuals earning up to Rs 12 lakh per annum, but the effects of this additional cash are yet to reach the shores of the economy. There’s still more.

The Reserve Bank of India – playing a dual role of being a custodian of both economic growth and inflation – recently cut interest rates by 50 basis points to help improve the credit outflow in the economy. Bankers say that it’s perhaps too little, and too late.

"A rate cut may not necessarily translate into significant credit offtake unless there is sufficient liquidity in the system," Pralay Mondal, CEO of private lender CSB Bank told The Economic Times. "It will take around 3-6 months to pass through to funding costs as deposit mobilisation pressures continue."

In simple terms, the problem is that rate cuts take a while to transmit through the banking system to the end borrowers. Moreover, only about 40% of banks’ loans are currently benchmarked to external interest rates – the kind that RBI has cut.

This means two things. First, there might not be a big credit offtake immediately. And two, reducing rates combined with the existing cash shortage could decrease bank margins.

Double whammy, indeed.

NBFCs need more cash, again

While banks grapple with this, NBFCs also have a list of demands for the government and the regulator. This week, NBFCs met with the newly appointed RBI governor Sanjay Malhotra to discuss key issues. In the meeting, non-bank lenders demanded that they be allowed to raise more money through the External Commercial Borrowings (ECB) route so that they can tide over the current cash crunch.

This ask comes in the wake of major banks reducing their exposure to NBFCs by cutting down the size of their credit portfolios basis the regulator’s nudge to reduce potential fatalities arising from concentration risk.

Meeting attendees said that the RBI Governor noted down all of these concerns and, in fact, reportedly also positively responded to the request to ease some of the ECB norms. Malhotra added that the NBFCs must balance their growth ambitions with good governance and sustainable business practices.

This kind of tempering has been a consistent feature of the tug-of-war between the regulator and its constituents even as the credit offtake grows steadily. It’s not yet clear just how much the RBI will relent but you can get the inside scoop on these demands here .

Whether it’s the RBI that ultimately rises to the challenge of restoring stability and peace in the financial services sector or the government – it's clear that it’s a task cut out.

As the blood continues to be shed on the exchanges, the watchmen of India’s economic growth await a savior.

I will see you next week.

Reading List

1. RBI banning bank business last resort but in public interest says new governor

2. Ensure fair treatment to customers: RBI Guv Malhotra to NBFCs

3. Kotak Mahindra Bank can issue credit cards again as RBI lifts restrictions

4. State Bank of India sees sector's personal loan woes easing on tighter credit rules

5. RBI proposes changes in Indian banks' websites to make your internet banking safe

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to always get all updates.

Cheers, Mayank