Persuasion is hard

by April 20, 2020 0 comments

The RBI is imploring banks to start lending but recent memory is still hobbling bankers’ confidence

The Reserve Bank of India (RBI) is doing a lot in trying to inject some liquidity and more crucially, some confidence into the Indian economy, which is currently suffering from the ill-effects of the Coronavirus-imposed nationwide lockdown. In a desperate bid to stop the economy from slipping into a deep recession, for the second time in a row, the Central bank, headed by Shaktikanta Das, sought to plug the gaps where it erred before and introduced yet another liquidity package to help businesses stay stable and ensure that the money reaches to those most vulnerable. However, banks have been unwilling to start lending aggressively. Measures include Rs 50,000 crore liquidity support for National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI) and National Housing Bank (NHB),   another Rs 50,000 crore for banks for funding and a quarter-percentage-point cut in its reverse repo rate, which has now been lowered by 25 basis points to 3.75 per cent. It is more than obvious that the Central bank wants to fund the financial institutions so that they can then forward it to businesses, big and small, and the most vulnerable — all of whom have been facing the pangs of the Coronavirus in some form or the other. But the Central bank can just fund the Treasury. As any student of history, like the RBI Governor was, knows, historical events have a habit in determining how we act today. Indian banks, both private and public, which got their hands (and the Indian taxpayer) burnt with bad loans handed out a decade ago, have been unwilling to really start lending as evidenced during previous rate cuts before the lockdown began. Of course, it would be unwise to predict just how banks will behave once the COVID-19 pandemic is over but with no clear end in sight, talk of an extended lockdown and the subsequent economic impact hanging in the air, we do not know just how banks will react. It is likely that their risk-averse nature will continue. What is also sure is the fact Indian entrepreneurs and industrialists will be unwilling to really start borrowing. However, both the RBI and the Government are desperate to make sure that when things do improve on the public health front, the economy is not beyond redemption. Unfortunately, with the Indian economy already having been on the back foot even before this crisis started, things could actually get a lot worse before they get better. What is needed right now is a stimulus package that can help the economy breathe. With the Coronavirus leading to a huge gap in demand and supply, there’s a glut in the market, leading to shortage of revenues.

This is because bankers and businessmen alike have no idea of what things will be like when we tide over the present crisis. This is not just the case in India but across the rest of the world. Banks are parking with RBI on a daily basis. So whatever money they have with them and whatever they are getting from RBI, the banks are giving back to the central bank instead of investing or lending it. Cheaper rates may not encourage thousands of businesses to start borrowing but it is possible that the Government could start doling out money to millions of Indians. This might really get things going and people will spend “free money” once this is over. Again, there is no idea of the efficacy of that strategy as well. People and companies have both incurred losses. Talks have gone from losing increments to actual worry about large-scale job losses across white collar, blue collar and informal sector jobs as well. At the end of the day, it all comes down to confidence. There might be no winner from this war, because we are not sure when the Coronavirus will finally be conquered. However, we have to start planning for the future from today. While the plans may not be perfect, since we do not know an end date for the start, we have to be prepared for it. We are already paying the price for having a woeful public health system.

(Courtesy: The Pioneer)

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