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Restore trust in bank for higher lending

05:55 AM Apr 20, 2020 |

The RBI has been proactive in its effort to mitigate the enormous pain stemming from the coronavirus pandemic. Governor Shaktikanta Das, a former Union Finance Secretary who replaced professional economist, Urjit Patel, on latter’s resignation, has not flinched from aggressively offering sops to the banking sector in particular and other economic actors in general, with the singular objective of arresting the growth decline.

And for his efforts, he has earned the gratitude of the Prime Minister as well. The tension between Mint Street and North Block which was common all through the UPA decade and partially during Modi 1.0 seems to have yielded to cooperation and coordination, much needed in these corona-distressed times.

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Last Friday, the central bank cut the reverse repo rate — the rate at which banks park their money with the RBI — by 25 basis points, making it 3.75 per cent. This was done to encourage banks to disburse more funds to industry, trade and other businesses or even to retail borrowers. Instead, banks were happy earning interest keeping money with the RBI without any risk whatsoever.

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In a way, some might find it unacceptable that the rate of deposits on savings bank accounts was further reduced to 2.75 per cent but banks were making profits keeping money with the central bank. And remember more than 90 per cent of the savings bank accountholders are from low-and middle-income groups who put their money in these accounts for a rainy day or to meet post-retirement expenses.

Indeed, the interest on various other post office savings schemes such PPF and other instruments too had been slashed in the wake of the pandemic. Of course, no one has complained because people understand the dire state of the economy due to the coronavirus lockdown. However, despite various steps announced by the RBI, captains of industry and commerce seem to be still complaining, wanting more and more to revive the economic engine.

There is little that the RBI can do now, it has announced a slew of sector specific concessions to help these to get back on their feet. On Friday, for instance, a refinance window of Rs 50,000 crores was announced for NHB, SIDBI, NABARD, etc. The stressed non-banking financial companies were extended a helping hand too, with the central bank directing banks to rescue them as well. Otherwise too, steps such as moratorium on payments by distressed debtors, finance companies, etc., were announced.

Thanks to the RBI interventions since the outbreak of the pandemic liquidity in the system has increased enormously. One estimate puts the excess liquidity at about Rs 7 lakh crores. However, the problem is that businesses are not coming forward to avail of the credit available virtually on demand (though the hesitation of the banks to lend given the fear of investigating agencies might still hold them back).

In such a situation, it is for the political executive to allay the well-grounded apprehensions of bankers for finding themselves in trouble for what may well be bona fide errors of judgment or a case of deception by borrowers. The point is simple. Banks would not go out and lend aggressively until the fear of CBI, ED, etc. is removed. Meanwhile, the RBI’s decision to further increase the ways and means facility for the States and Centre by 60 per cent too is meant to help them meet the huge additional burden of the pandemic.

Ways and means advances at the repo rate of interest are for a three-month period each after which these have to be repaid. A limit of Rs 1.2 lakh crores for the Centre and Rs 51,560 crores for the States will certainly be not enough to meet the huge burdens imposed by the pandemic. Despite sector-specific incentives and even clearances for some sections to resume operations from Monday, April 20, the impact of the invisible killer is so overpowering that it will take a yeoman’s effort to restore a modicum of pre-corona normalcy.

Meanwhile, after the RBI has done its good turn, the government should unveil its own much-anticipated concessions to industry, retail trade, commercial establishments, etc. for them to resume work. Without the revival of the economy, revenue collections may not be even a small fraction of the budget estimates this year. The government intervention in this regard brooks no further delay

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