With relaxations in the monetary policy failing to lift lending, as reflected in non-food credit falling by Rs 1,157 crore in December, the government has now started prodding banks to increase credit to the economy, as it is being seen crucial to beat the slowdown.
In a meeting with public sector banks on Friday, the finance ministry has advised bank chiefs to increase lending to companies and consumers. The government has asked the banks to increase their credit growth target by up to 2%, although some bankers said it would not make any material difference as their growth was already higher than the target of 20-21%. ?The government and the RBI have asked us to increase lending in various communications and meetings in the past 2-3 months.
This is being seen as crucial to beat the slowdown,? said Punjab National Bank chief general manager LP Agarwal. When asked on why banks were reluctant to lend, Planning Commission deputy chairman Montek Singh Ahluwalia on Tuesday said, ?That is something the ministry of finance is talking to the banks. I am very sure that the atmosphere will improve over a little bit of time.?
These things do take some time, Ahluwalia said on the sidelines of a conference on rural education. The RBI slashed its short-term lending and borrowings rates by 1 percentage point each early January, its fourth cut in four months.
Another banker who attended the Friday meeting at the finance ministry said the emphasis on providing financing to cash-strapped sectors including small & medium enterprises, infrastructure and real estate.
Non food credit, which stood at Rs 71,287 crore in November and Rs 1,02,760 crore in October, contracted in December. ?Demand for credit by oil companies has declined as they have turned cash surplus. This could be one reason for contraction in non food credit in December,? Agarwal said. Banks are also required to submit fortnightly report on sectoral credit disbursal in the economy.
Several banks have been reluctant to ease their lending rates, despite sharp cuts in policy rates by the Reserve Bank of India (RBI). Banks are also being conservative in lending on apprehension of an increase in non performing assets (NPA) or bad loans on their books in a slowing economy. The RBI has significantly eased NPA rules for restructuring loans for commercial real estate and select infrastructure projects. Bankers note that although restructuring has started picking up, fresh lending was still very low.