Shielding bona fide loan calls will spur credit growth

By: |
November 11, 2021 4:15 AM

Loan-size ceiling under accountability guidelines needs to be raised, arrests must follow due probe, not FIRs

Even if banks fear that some of this may not come back—the government offers only a partial guarantee—they have been fairly enthusiastic about the ELCGS because the government has backed the scheme.Even if banks fear that some of this may not come back—the government offers only a partial guarantee—they have been fairly enthusiastic about the ELCGS because the government has backed the scheme.

Finance minister Nirmala Sitharaman is scheduled to meet the heads of banks next week, ostensibly to nudge them into lending. The government’s concern is understandable, loan growth has been all but sluggish. The increase in non-food credit was flat at 0.1% between March 26 and September; even over a longer period in the year to September 24, the growth is modest at 6.8%. Again, much of this has been in the form of retail loans because banks claim there is little demand from companies. To be sure, there has been a fair bit of disbursement under the Emergency Credit Line Guarantee Scheme—the scheme promoted by the government to help MSMEs; a chunky Rs 3.5-4 lakh crore has been lent to smaller companies. Even if banks fear that some of this may not come back—the government offers only a partial guarantee—they have been fairly enthusiastic about the ELCGS because the government has backed the scheme.

As such, at a time when risk aversion is running high, the government probably needs to initiate more of these schemes. There are those who will argue that it has a fiscal cost, in the event some of loans go bad, and, therefore, risky. But, it is a risk worth taking because it could create a virtuous cycle and give the nascent recovery the necessary push. The fact is bankers remain wary, even scared, of taking risks; they are reluctant to lend to companies with a credit rating of below AA. They have made it amply clear they do not intend to take even the smallest risks. While it is their business to take calculated and measured risks, the problem is they fear harassment in the event an exposure goes bad. Given how top banking executives—Usha Anantasubramanian, for example—have been treated so badly, that is a justified fear.

The recent arrest of former State Bank of India (SBI) chairman Pratip Chaudhuri was shocking and would have rattled the banking fraternity. That Chaudhuri was arrested despite all due processes having been followed in the concerned matter and the transaction having been approved by the NCLT and even the Supreme Court (SC) is unfortunate. The government needs to address this issue by amending the law and plugging the loopholes to ensure that commercial cases involving banks are treated differently, and an FIR should not lead to an immediate arrest. The power to arrest may be needed, but should be used only after due discretion; however, these powers, it appears, are being misused, and the government must build in some protection for bankers.

Last week, the finance ministry came up with accountability guidelines—for loans that carry some risk of default—to help ease the anxiety at public sector banks. From April next year, public sector bankers will not be held accountable for ‘bona fide’ loans of up to Rs 50 crore going bad. Moreover, banks have been given some flexibility on the scrutiny of smaller assets—in the region of Rs 10-20 lakh. These guidelines are helpful, but threshold needs to be raised. While we cannot have malfeasance, bankers cannot be harassed and taken to task for every loan that goes bad. If the government wants to push credit, it needs to reassure bankers it is taking legislative steps to protect them. The level of risk aversion is threatening credits flows; that cannot be good for the economy.

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