Hyderabad: India, unlike other western nations could limit the loss of millions of lives by effectively implementing the lockdown. However its achievement on the front of controlling the virus spread came at a cost, which is indeed inevitable.
As the nation went into lockdown, the economic activity plummeted, disrupting the businesses, lives and livelihoods of millions of Indians. Eventually the banking and financial system too had to suffer the impact.
It is in this context, the Reserve Bank of India announced a sleuth of measures to assure the markets and ensure that there would not be a scarcity for liquid cash in the economy.
The latest among such measures is its announcement to assign Rs 50,000 crore exclusively for commercial banks, to lend to the mutual funds. This is a special facility to ensure that there is enough liquidity in place for the mutual fund industry, whose Assets Under Management (AUM) is nearly Rs 15 lakh crores.
This facility is a 90-day repo-based lending window, where the banks can get the credit and later offer loans to mutual funds.
The fact that this liquidity enhancement measure came from the India’s central bank just few days after Franklin Templeton Mutual Fund’s announcement of closure of its six debt funds, suggests that the RBI struck the right chords in order to avert any contagion in the already stressed up mutual funds industry.
Enough liquidity in the system:
However the pertinent question at this point is, to what extent the benefits of this policy measure would trickle down to the mutual funds at the grass root level. The same was discussed in the latest review meeting of the RBI on May 02, 2020.
The recent experience of RBI with the second round of Targeted Long Term Repo Operations, touted as TLTRO 2.0 in the financial circles holds answer to this.
Under this facility, the commercial banks could borrow funds from the central bank at 4.4 percent (repo rate) and lend them at a higher margins. In order to ensure that liquidity would flow to the cash starved sectors, the RBI mandated the banks using funds under TLTRO 2.0, that half of the money availed should be lent to the Non-Banking Finance Companies (NBFCs) and Micro Finance Institutions (MFIs).
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But the risk averse Indian banks showed little interest in the auction. As a result, against Rs 25,000 crore worth funds offered, only bids worth Rs 12,850 crore were received.
This Luke warm response from the banking sector had once again highlighted the reluctance of Indian banks to take risk, no matter the incentives that it brings along.
At this juncture, banks are ready to sit idle on liquid cash, rather than lending and adding credit to their books. In fact that there is already an excess liquidity of nearly Rs 4.85 trillion as on 24 April, 2020, according to the Icra credit rating agency.
It is in this context it is to be noted that the central bank had injected funds equivalent to 3.2 per cent of GDP into the economy since the February 2020 to enhance liquidity.
Already the policy rate is at a 11 year low and even the reverse repo rate was slashed to 3.75 percent. But the lending situation on the ground does not reflect the same, which suggests the risk averse nature of the Banks.
The State should step in:
The banking system too cannot be blamed for this situation, given the burden of ‘bad loans’ on them. As the economy slows down and growth prospects appearing to be bleak in the near term, there is a possibility that there would be a further surge in the loan defaults.
On the other hand there is a looming uncertainty on the returns on investment in the financial markets. Even the capital markets are facing headwinds, given the sword of credit ratings downgrade hanging over the heads of many mutual funds.
Given this situation, it is apparent that the lenders would hold their pockets tight, driven by the fear that the loans made by them, might turn into bad debt.
This atmosphere of fear and insecurity among India’s banks is holding them back from taking risks and come out for lending to the cash strapped sectors. Any continuation in this trend further, could eventually negate the latest policy objectives of India’s banker’s bank.
Thus what the banks need now is not more cash, as they have enough of it. They need an assurance that ‘it is ok if it goes wrong’. Only a Sovereign State could do it and it is time for it to do it, at least for the public sector banks. After all, the crisis at hand is extra ordinary and normal solutions may not come handy.
(Article by Dr Mahendra Babu Kuruva. He is an Assistant Professor in the Department of Business Management, H.N.B.Garhwal Central University, Srinagar Garhwal, Uttarakhand. Views expressed above are personal.)
