Credit aversion is at its all-time high in the Indian banking space. So much so, that an individual borrower of home loan gets cheaper rate than a state government borrowing for similar 15-year tenor. And so much more that banks are ready to leave the funds as surplus liquidity and not to lend.
The analyst communities’ playing favourites of the season swings from retail lending being good to whole sale lending is better to real-economy lending could be better. Consequently the stock-market-focused-listed-institutions want to claim that space offered by the analysts to get a thumbs-up. With the mood having shifted a few months ago, quite a few jumped onto the bandwagon to claim that they will shift their lending mix. This yo-yo of where the lending is directed, should be determined by where the consumer needs & demands are and if the institutions can cater to that demand profitably.
With the current logjam in the lending space across all types of institutions is a reflection of either liquidity not available (for non-banks) to aversion to lend (banks). The regulator RBI has taken many steps in the past many weeks to get the signalling for banks to lend. Probably it is time to do more than signalling and use combination of (new) rules or regulations to push the banks to lend. These suggestions could be used for a temporary period to get lending happening.
Fixed reverse repo:
RBI can look at putting a ceiling of the amount of fixed reverse repo investments that banks can do; say 5-10% of their excess liquidity only. This could be a catalyst to nudge the banks to use the rest of monies to lend. Probably this “harsh” step as some bankers might call it, could be for a short period to kick start lending to beat the post-covid-economic-woes.
Reducing the fixed reverse repo rate from 4% to 3.75% is NOT disincentive enough for the banks. They can still park the liquidity with RBI instead of lending.
Or even the harsher way could be to bring the above rate to closer to zero !!!
Lending to other critical sectors:
The banking system has sectoral exposure limits set by RBI. Some as ceiling limit, and some as floor. For example, without Priority Sector Loans being part of such a rule, and agriculture in that segment, banks may not be tempted to invest in those. (NABARD bonds as reprieve, notwithstanding !).
Similarly, RBI can use a rule to give mandatory minimum exposure proportion that banks have to take across sectors including retail, SME, MSME, whole sale, industries etc. This could ensure that transmission of liquidity happens to these sectors, some of them whom are the neglected-lot for long.
To reduce the issue where certain banks may not have capability or competence in some of these sectoral areas, let RBI allow consortium-lending where the lead-bank, which has that competence will lead the investment round. And all the banks participating in that consortium will share the risk pool as well.
Confidence to bankers:
The officials, both political and regulatory, have to give confidence (yet again) that no punitive action will be taken by any agencies for any credit decision going wrong or if NPAs come into the account. This will go a long way in assuaging the worries of the bankers.
Make private banks lend to real-economy-sector:
Currently many a private bank lends only to high-rated corporates and to retail loans. And if you add to this scenario of them buying NABARD bonds instead of actual agri-lending on the ground, the phrase “lazy banking” sticks to the entire banking industry, unfortunately.
Public sector banks (PSBs) have actually done the brunt work of funding Nation-building activities like funding infra projects, industrial sectors, etc for long time. This heavy lifting must also be shared by other banks. While capitalists might argue that the choice of which segmental exposure must be decided by the promoters & boards of those banks, it is also prudent to understand as an economy which at best is developing markets status, needs nurturing of its enterprises and entrepreneurs.
Probably this is a good time for using a crisis to convert into an opportunity to kick start the lending activities, and hence the economy at large. Banks can actually be institutions which participate in real-economy-lending. Which in effect, was the original intent of the banking system.
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