Clearance to take off for stalled credit

Clearance to take off for stalled credit

The government’s move to infuse upfront an additional capital of ₹70,000 crore into public sector banks (PSBs) is welcome. The promised removal of the Damocles’ sword of punitive investigation of any banking decision hanging over the heads of bankers today will help banks lend the additional liquidity leveraging this capital would enable. The moves to support non-banking financial companies (NBFCs) — such as enhancing additional liquidity support to housing finance companies to ₹30,000 crore by National Housing Bank from ₹20,000 crore and co-origination of loans by PSBs jointly with NBFCs that are reeling under a liquidity crunch — will provide a booster for fresh loans to the MSME sector. A transparent one-time settlement policy being provided by banks to benefit MSMEs and retail borrowers in settling their overdues is pragmatic. But banks also must acquire the expertise to assess MSME loan viability and invest in data mining.

Making banks link their lending rates to the repo rates will help better transmission of monetary policy. But for this to work without impairing bank financial health, multiple structural rigidities in the system must be removed. Public sector pre-emption of the bulk of household financial savings must end, for the bond market to really take off to provide longer-term funds for infrastructure projects. Steps such as further development of the credit default swap markets, facilitating increased trading for price discovery, and establishing an organisation to provide credit enhancement for infrastructure and housing projects make eminent sense, as does onshoring the offshore rupee derivative markets.

A coherent policy of managerial reform, including of remuneration, at public sector banks must accompany the measures announced, for them to take effect.