NON-COOPERATION AND COOPERATION

An example of non-cooperation may be non­cooperation between the Indian banks and many of the loan applicants from amongst retailers and real estate developers during economic slowdown.

1. The rigidity to lend in fear of further default on part of the b anks as per Dun and B radstreet (2012);

2. The banks’ existing burdens of nonperform­ing loans as per Fontelana-Khan (2011); and

3. Hike in the risk weight by the RBI on credit to the real estate industry as per Press Trust ofIndia (2005). Such rigidity led to the above mentioned non- cooperation.

From the viewpoint of a prospective corpo­rate borrower, whether the lending official in the bank would cooperate or not depends on the performance of past loan assets of the bank and the credit risk for the relevant industry. When the borrower is a businessman, the loan repaying capacity depends on performance of his business. If it is project finance, there may be information asymmetry between lenders and borrowers regard­ing the performance of the project at the time of the loan disbursement.

Depending upon the degree of uncertainty in the business, the expected return from the loan or the yield of the loan would vary. A real estate developer’s repaying ability depends on the stream of revenues generated from selling office space or apartment. In the state of falling property prices, as reported by Orange (2008), a bank would expect a higher rate of return from the loan and accord­ingly set the Equated Monthly Installment (EMI) in order to enhance the present value of the future payments although the borrower would prefer a lower EMI. These contrary preferences would lead to obstacles for cooperation. This may be explained with a Lemma after proving it by contradiction.

Lemma: In the state of low demand in any industry, the preferences regarding the amount of EMI contradict between a bank and a corporate borrower in that industry.

Axiom: ‘p’ is probability of the property market experiencing falling demand and ‘1-p’ is the probability of the property market not experiencing the falling demand.

Proof of the Lemma: If property demand is declining, the value of the future payments to the lender is nV; otherwise it is V, where n < 1. The bank official would approve the loan application if the expected value of the future payments is at least equal to V, i.e. (1-p)V + pnV = V, i.e. 1+p(n-1) = 1, i.e. p(n-1) > 0, this is possible when n > 1. This contradicts the original assumption.

The following are applications of pure strategy, the Nash Equilibrium, maxmin strategy, mixed strategy, sequential game, decision tree, commit­ment and threat in a duopolistic structure and the

Prisoners’ Dilemma in an oligopolistic structure in Pindyck and Rubinfeld (1995) to the strategies of the lending banks.