Once again, the government has relied on financial intermediaries in India to give a third boost to the economy that is already on the way to recovery.
The Atmanirbhar Bharat 3.0 package announced on Thursday had 12 measures focused on generating employment, boosting manufacturing activity, helping rural recovery and improving the ailing real estate sector. But the credit element was unmistakably there. Support totaled ₹2.65 trillion, but economists believe the real fiscal cost would be less than half.
Two major measures were the extension of the current emergency credit line guarantee scheme (ECLGS) until March 2021 and the announcement of a new scheme for 26 sectors.
Under this new credit scheme, banks could make loans to stressed companies in 26 sectors identified by the KV Kamath committee earlier this year. The conditions are that these companies should not have payments past due beyond 30 days at the end of February. Companies in these sectors would be allowed to obtain up to 20% of their outstanding loans starting in February as fresh credit fully guaranteed by the government. Lenders can make these loans without collateral and with the credit risk fully assumed by the government. Furthermore, these companies can obtain a one-year moratorium on repayment of the principal.
At first glance, this seems like a dream loan opportunity for banks. Banks can earn interest on these loans for up to five years, when the risk is fully borne by the government. It is almost similar to investing in government bonds but with a high yield. It’s a win-win situation, as banks don’t take risks while struggling companies get much-needed funds.
But rarely are loan decisions that simple and binary.
The originally planned credit guarantee scheme with a target disbursement of ₹3 trillion have seen almost half the amount loaned by banks. This shows that, despite the low risk, banks are uncomfortable to lend. Analysts warn that forcing banks to lend to companies where assessing risk has become a challenge because the pandemic puts banks at higher risk, with or without credit guarantee. “Today’s announcement may be potentially financially negative if the government and the Reserve Bank of India resort to moral suasion or more direct measures to push the bank to make accelerated loans to sectors affected by the pandemic,” said Sujan Hajra, chief economist at Anand Rathi. Values in an email.
In addition, the one-year moratorium would tarnish credit quality. Perhaps these risks made investors wary, as bank stocks weren’t exactly enthusiastic about Thursday’s moves. The Nifty Bank Index ended almost 2% down despite the overall market rebounding.
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