1. The government, while announcing its Rs 20 lakh crore COVID-19 stimulus package, has chosen banks and their regulator, Reserve Bank of India (RBI), to do the heavy lifting for bailing out the economy. RBI has been asked to provide abundant liquidity to banks through bond buying programmes like long-term repo operations. Banks, in turn, are expected to pass on this liquidity to businesses including corporate and micro, small and medium enterprises (MSMEs) and home buyers in the form of loans.
In government calculations, it saves them the unpleasant task of borrowing on its own account and spending directly through fiscal means. A higher direct public spending by the government will lead to a higher fiscal deficit and raises the risk of a downgrade by global rating agencies.
2. Banks, however, have a poor track record of passing on liquidity to industry. Bank credit to industry grew at an annualized rate of just 1.8 percent in the last five years while credit to medium enterprises shrunk from Rs 1.24 lakh crore at the end of March 2015 to Rs 1 lakh crore at the end of March 2020.
This sluggish loan disbursal can be attributed to two factors – one, the public sector banks, which are the prime lender to the commercial sector, have been battling high levels of non-performing assets as well as low capital adequacy for many years. This severely restricts their ability to provide large scale loans to industry.
Secondly, most companies in the capital intensive sectors have been suffering from low capacity utilization and poor profitability for years, hindering their ability to launch new projects.
3. The liquidity in the banking system, in the last few years, largely went to retail loans, like for cars, housing and consumer goods. Consumer loans grew at a compounded annual growth rate of 17 percent in the last five years, growing from 11.7 lakh crore in FY15 to 25.5 lakh crore at March 2020. While these retail loans provide a short term boost to consumer demand, they have little or no bearing on the long term investment in the economy. They don’t do much to improve the Indian economy’s growth potential that requires investment in industry and infrastructure.
4. Alongside, loan to industries generate income and employment, which makes the loan self liquidating. The income stream from the asset created by the loan pays for it. In contrast, personal loans don’t generate income but are used by individuals to improve their lifestyle. This only serves to create financial liabilities for the borrower without generating any additional income.
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5. The Coronavirus or COVID-19 crisis is the worst time ever for companies and individuals to take on liabilities because of the limited visibility on revenues and incomes. This will make it tough for fresh borrowers to service the debt. What people right now require is purchasing power, which can be addressed through direct fiscal measures. The government can do this either by putting cash into the hands of the people or stepping up public expenditure in new projects to create fresh demand and jobs in the economy. Instead, the Indian government has chosen the easy option of outsourcing the burden of stimulus to the banking sector.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).