RBI steps increase lending, but sector-specific package must: Bankers

RBI by reducing reverse repo rate by 25 basis points has sent clear signals to deploy that money - either by investing markets (bonds and short term paper) or by extending credit

While the Reserve Bank of India’s moves like providing more liquidity and easing asset quality norms would create favorable grounds for an increase in lending, a package from the government to kick-start the economy is a must for these measures to have a meaningful impact, bankers said.
 

Sunil Mehta, chief executive of the Indian Banks’ Association (IBA), said three enablers that would encourage banks to lend were cheaper funds, a regulatory leeway on asset quality norms, and guarantees for loans, especially on those given to the micro, small and medium enterprises (MSMEs). This will need to be complemented by sector-specific packages, he said.
 

“Banks are now sitting on liquidity and by reducing the reverse repo rate by 20 basis points the RBI has sent a clear signal to them to deploy that money — either by investing in markets (bonds and short-term papers) or by extending credit. The transmission will happen much more effectively and loans will become cheaper for various classes of borrowers,” Mehta said.
 

Bankers said sectoral packages were necessary for meaningful support from banks to units affected by the disruption caused by the coronavirus disease (Covid-19). It would be crucial in assisting firms to normalise operations after the nationwide lockdown is lifted. 

A top executive of a mid-sized private bank said RBI had tried to address the needs of small non-banking financial companies (NBFCs). However, tackling the problems faced by other sectors would be tougher absent some credit support from the government, the executive said. “Large companies will get credit anyway.”

R Sharma, managing director and chief executive of IDBI Bank, said the steps would make banks more inclined to lend. “It is also necessary that various departments clear dues of firms. This will give much needed relief to cash strapped units,” he said.
 

Faced with the twin issues of an economic slowdown and the lockdown, the pace of bank credit growth fell sharply to 6.1 per cent in financial year 2019-20 (FY20), from 13.3 per cent in FY19.
 

While banks were able to stave off the impact of the slowdown for most of FY20, the Covid-19 blow came in the final month of the fiscal. Scheduled commercial banks in India dispensed Rs 6 trillion in loans in FY20, much lower than the Rs 11.46 trillion disbursed in FY19, according to RBI data.
 

Padmaja Chundru, managing director and chief executive officer of Indian Bank, said the RBI’s tone was one of empathy and support. With optimism creeping back slowly and the support being extended through emergency loans and other lines of credit, this would help all sectors, especially MSME and retail, she said.

Bankers said the impact of the economic disruption would be deep and providing relaxation by allowing 90-day asset classification standstill for accounts covered under moratorium was a temporary step. The restructuring of many borrowers’ accounts was inevitable.
 

IBA’s management committee is expected to take up issue of allowing one-time recast for accounts hit by the lockdown. The panel is expected to meet on Saturday. The deft structuring of Long-Term Repo Operation (LTRO) regime is also expected to make banks amenable to lend to NBFCs and MFIs, especially small and medium-sized entities.
 

Karthik Srinivasan, senior vice-president and group head of Financial Sector Ratings at ICRA, said the Rs 50,000 crore LRTO focused on NBFCs should partly help alleviate liquidity related concerns for the sector.

The Rs 1 trillion funding lines (including indirect funding through the National Bank for Agriculture and Rural Development, SIDBI and National Housing Bank) was expected to take care of nearly one-and-a-half months of liquidity requirements of NBFCs.
 

Unlike the earlier framework, the mandate to invest in mid- and small-sized players would help provide more entities access to funds.