Banking amid pandemic

We are living in unprecedented times where normal definition of “Normal” is no more relevant. What is going to be the “New normal” & when such a ‘new normal’ will stabilize is anybody’s guess. To contain the pandemic & to break the chain of transmission world over various measures almost since the beginning of 2020 have been adopted but without much success so far. While there is an urgent need to break the chain of transmission there is an equally urgent need to strengthen another chain that of supplies so that world economy gets on the rails, manufacturing starts, factor of production are again optimally deployed & demand disruptions are removed. World bank in its latest outlook (June, 20) also says that if outbreak persists longer than expected more than 100 million people will be pushed to extreme poverty (people living on less than $1.90 per day). 

This calls for economic activity to restart with gusto particularly in EMEs like India & for that to happen financial intermediaries such as banks & FIs have to play a highly proactive role to push lending as it is well evidenced that for GDP to grow by 1% , credit need to grow by at least two to two and half times of that. GOI on its part has rolled out various measures such as emergency credit lines for MSMEs, have enlarged the coverage by changing definition of MSMEs, have put on hold IBC, pushing lenders to jack up lendings. Regulator has also made available enough liquidity, allowed moratorium on repayments, given liberty to banks to reduce  margin in WC limits wherever warranted, allow additional 20% funding  to MSMES having outstanding up to 25 cr etc.

But for lending to pick up to the desired level an enabling environment need to be in place where bankers are not only empowered but feel emboldened to take credit decisions without fear. Look at y-o-y credit growth – since Jun,18 i.e. for last two years it is all thru in single digit & was just 6.4 % as on May 8, 2020. For economy to revive a robust pick up in credit is the demand of the hour. Almost entire sanctioning to Mudra & SMEs beneficiaries is confined at the branch level.  Though difficult to objectively substantiate but we need to admit that one of the reasons for such abysmal credit growth is fear psychoses among the bankers sanctioning & disbursing such loans. Fear that they will be hauled up down the years if some accounts go bad. Few accounts going under is the normal cost of doing banking business. We can’t have a situation where NPA will be zero.  On giving loans, NPLs will occur but save malfeasance & mala fide acts others need to be treated as normal credit risk. Bankers have only to ensure that they avoid being reckless & follow prudent underwriting standards while regulators & investigators have to ensure that commercial decision are not seen suspiciously in hindsight.  Perception that for every NPA someone has necessarily to be held accountable has to be tangibly demolished. In additional following steps may help push lending:

1. Loan restructuring (one time) without change in asset classification based on lenders judgement — this may also allow lenders to handhold the genuine cases & save themselves from elevated level of NPAs.

2. Loan forgiveness — some countries have announced this measure.  In our country even in NORMAL times centre as well as states have resorted to massive loan waivers. This is an unusual time & govt may work out modalities to give some back ended loan forgiveness (say 20/25%) to MSMEs & other adversely effected sectors.

3. As Govt is giving lot of push to MSME, regulator may also reduce RWs for MSME. RWs may be reduced from 75% to say 35% in respect of SMEs which qualify as Regulatory retail.  This will help free capital & banks with the same amount of capital will be able to give more loans.

4. There is going to be diminution in credit quality of certain borrowers due to rating downgrades resulting into levying of higher interest by banks. In such cases if the borrowing co has been making NP during the last three years &  there has been a progressive increase in its NW over that period  then for one year at least they may be spared of increased  interest.

5. The guidelines stipulate that 20 % additional amount may be given on the outstanding amount not exceeding Rs. 25 cr. may be amended so that 20% entitlement is based not on the outstanding but on the amount  outstanding or limit sanctioned whichever is higher.  Because entities who have limit of Rs. 25 cr but outstanding less than Rs. 25 cr would the ones who have been regular in repaying the loan. Such entities are obviously credit worthy & additional amt will help them to augment either their WC or expand capacities.