Government calls for compulsory bank loans needed to help small borrowers overcome COVID-19 financial emergency

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On April 23, bankers effectively told the Reserve Bank of India (RBI) that they could not take the risk of lending to small borrowers. How they did it needs a long explanation, which is outside the scope of this commentary. Suffice to say, they said they can’t take money from the RBI with a commitment to lend to microfinance institutions, small businesses, stores, etc.

Laborers, for example, who work in small units littering cities, such as grocery stores, tentwallahs, milk carts, etc. will have to wait longer. These units are in dire need of liquidity, but the Non-Bank Financial Corporations (NBFCs) that fund them cannot get money from the banks. The banks are not interested.

This is a massive crisis in the COVID-19 pandemic. Cash, in any form, digital or in the form of banknotes, is king in an emergency. Any housewife understands this. And COVID-19[female[feminine is a long emergency, both medical and financial. It goes without saying that if the economy is to emerge from this financial emergency, most of its businesses, formal and informal like our farmers, will need cash, that is to say liquidity.

The only agency that can fill this liquidity are Indian banks. It’s not that they can’t do it. Still, they told the RBI they didn’t want to lend because the risk of lending to small entities increased. A data point will make this clear. As of April 17th, banks have parked Rs 6.9 lakh crore with RBI, earning a decent interest rate of 4%, instead of making any effort to lend. The sum parked with the RBI represents about 6.7% of the total bank credit outstanding in the economy at the end of March 2020. If released into the economy, much of the distress would have been released. could be wiped out.

Banks have simple logic for their extreme risk aversion. They know that businesses and unincorporated businesses like small-scale manufacturing units or stores or farmers, basically anyone in need of cash, are potentially in trouble. Despite the help of the banks, many of them will not succeed. There is no way to build a counter argument that these losses will not happen. Banks fear they will become scapegoats if these losses occur, just as they would have been blamed for the loans they extended to lift the economy out of the crisis after the global financial crisis of 2008-09.

Yet it is impossible for the Indian government to offer aid to any sector without involving the banks in the game. Should it be suggested that the best option at this stage is to make it compulsory for banks to offer loans? ready for all the customers who approach them now? They should not have the discretion to refuse a plea. Understand that this is not like a national loan where all interest is waived.

What this policy would do is forgo the ability of banks to pick winners. It is the losers who need support now. This is a suggestion that was first brought up by Pronab Sen, former chief statistician of India. Sen has been on the former Planning Commission for decades, where he also drew up the 10th Five-Year Plan. He therefore knows the typical mindset of the Indian banking sector.

A compulsory credit offer is therefore not scandalous. It will simply mean that a banker will have virtually no opportunity to refuse a loan under the current circumstances. Such an approach requires the intervention of the Ministry of Finance and not of the RBI. The latter is the regulator and it can only push the banks in a particular direction. He can no longer ask the banks to do more. Decisions of boards of directors must be made by shareholders, in this case the majority owner, the Indian government, to make working capital loans available on a large scale. Once that’s done, the money will flow easily to everyone involved. Shareholders can easily decide on a cascade mechanism to help small and micro businesses at first, and only then decide to offer loans to large companies.

What are the risks ? There is the apprehension that someone who is unscrupulous will get fat. It’s possible. But let’s examine the counterfactual: Companies of all kinds have already started asking the government for similar support. If the government accepts advocacy from any sector, how will it work out? In all likelihood, the government will provide a tranche of budget support which will be generously supplemented by bank loans. All these loans will have to be a) based on a subjective assessment and b) discriminate among some.

Such an option is more prone to abuse by unscrupulous people. Each of these loans will immediately carry the hue of crony capitalism. How is the voter, in assessing the government’s record, supposed to understand that sector A is more affected than sector B when the crash is so massive?

Instead, if bank lending is made mandatory, subject to a narrow set of guidelines, it will be industry independent. The administrative pressure on the banks will be much less. They will not have to worry about evaluating companies at the sectoral level, to advocate for government budget support. This is a huge relief at a time when most of these banks merged less than a month ago. Officers from different organizations don’t even know their counterparts on the other side of the desk. There is no other choice at the moment than to offer a simple and transparent device like compulsory loans to get banks to reach the public.

This would be especially helpful as it would take the sting off the ‘Triple C’ – Comptroller and Auditor General of India (CAG), Central Vigilance Commission (CVC) and Central Bureau of Investigation (CBI) at this point. When they are mandated by the government, the banks will not be called into question. The banks will only be the executing agencies and will be able to carry out their task without fear or favor.

(The writer is an economics journalist and can be contacted at [email protected])

Disclaimer: The opinions expressed above are those of the author. They do not necessarily reflect the views of DH.

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