Chief Economic Adviser Krishnamurthy Subramanian has suggested banks to aggressively lend and earn higher interest, instead of earning only 3.5 per cent from parking funds in the reverse repo with the RBI. CEA Subramanian has assured that banks will not have to bear the risk of aggressive lending as the government has fully guaranteed most of the loans. Pointing towards the Rs 3 lakh crore loans to MSMEs, CEA Subramanian said in an interview to The Indian Express that those are risk-free loans and banks can write it like a risk-free product.
Subramanian highlighted that nearly Rs 8.5 lakh crore was parked with the RBI’s reverse repo operations, which earns only about 3.5 per cent interest rate. Thus, it makes sense for the banks to use the aggressive lending as a risk-free investment where they can earn a higher interest rate, he added. After Prime Minister Narendra Modi announced the special economic package worth Rs 21 lakh crore, Finance Minister Nirmala Sitharaman detailed out the package which included government-backed guarantees for the loans for various sectors.
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With the extension of a loan moratorium period, the banks are under pressure and how things will fall into place and consumer behaviour in the near future are also too uncertain as of now. Given these circumstances, the banks are reluctant to aggressively lend and increase their risk. That too, when the Indian banking system is already going through a phase of low-earning and increased provisioning burden.
However, the guarantee from the government has come as a light of hope for the banks which serves two major purposes, which are increasing the profitability of banks and transmitting liquidity into the market. With more liquidity in the market, the government expects that the demand will shoot up and will give motion to the wheels of the economy, which has come to a standstill due to the disruptions caused by the coronavirus pandemic and the nationwide lockdown.