Bankers’ Dilemma: National Interests Vs Business Interests

The aftermath of all disasters generally give rise to hope, followed by optimism and then the way forward. The COVID-19 scenario across the world is moving more or less on the same pattern. As India fights the war against this pandemic and claims to have kept it under control, it is indeed a great achievement, particularly when many developed countries are still struggling to be on their feet. Having managed to save many lives the next logical step is to sustain the livelihood of millions of people and kickstart the economy as soon as possible.

The complete shutdown of economic activities involving small agricultural farms to large industrial hubs, from street vendors to mega shopping malls, all have been impacted and need to reboot. It is not going to be easy since the MSME segment, which is generally short of liquidity, has a tendency to succumb easily to financial shocks. The farm sector, which survives on a cyclical basis, has equally suffered; the lockdown having seriously disrupted the supply chain and the marketing links. Service sector encompassing millions of activities have been out of business. There will be several hurdles; labour, supply chain, markets, price, exports and so on. The most critical challenge will, however, come from cash crunch and liquidity. This is where the entire financial system, namely, the Government, the RBI, Banks, NBFCs and other players will have to pitch in to bring the derailed economy back on track.

Many strong businesses may probably revive on their own but in all likelihood most may not. All these call for a strong coordinated action by every stakeholder. It is heartening to see that it has already started. During the last few weeks, the Union Government has come out with several measures to boost the confidence of the industry, including farm sector. The Centre has announced a fiscal stimulus of Rs 20 lakh crore, which prima facie seems quite impressive, but we may have to wait for the details. RBI has opened up several windows to provide liquidity to the system. Moratoriums have been permitted to ensure that balance sheets of neither banks nor firms are adversely affected. But the real issue is whether deferment of debt by three months is really the solution. The economic activities have to restart within this time for the firms to make the payment at the end of the moratorium period which seems unlikely going by the present situation. The labour force is now widely dispersed and getting them to the place of business again is going to be a Herculean task.

It is in this scenario that we may have to assess the banker’s willingness, or rather the lack of it, to lend notwithstanding availability of sufficient liquidity in the system, thanks to all the recent liquidity measures taken by the RBI. Banks have been parking funds with RBI in reverse repo which gives them a return of only 3.75%. Analysts feel this may be due to lack of demand from highly rated borrowers and bankers aversion to lesser rated credit. Here it is difficult to prejudge and conclude that banks are reluctant or shy to disburse credit.  Despite regulatory relaxations in the classification of the loans, which will address their balance sheet concerns, banks are surely haunted by the fallout fuelled by NPAs both past and future. The fear of action by enforcement agencies is also a factor which plays in their minds. Will there be any sovereign support for recovering the dues?

Right now in almost every forum the central and the state governments and the RBI have been exhorting banks to lend as much as they can which would enable adequate credit flow to the wobbling economy. Banks in India have been facing this issue of supporting the economy in the aftermath of many such calamities in the past and understandably there is a SOP in place backed by the regulator to address specific challenges. But the sheer enormity and scale of impact of COVID-19 calls for proactive action much beyond the prescriptions and it is in the fitness of things that the Government and RBI are nudging banks to do their best.

Given the structure of the country’s banking system, which is predominantly government-owned, banks will definitely prioritise national interest over business interest and do their best. How this commitment will translate on the ground could be anybody’s guess. But several questions will need answers. Can banks override their own credit norms putting aside their process of due diligence? What will be the answer to the accountability issues? Can they get adequate legal protection in their recovery process? Moreover, how will their commitment get transmitted to the grassroots-level, particularly to the millions of small KCC holders, Mudra loan beneficiaries and other small entrepreneurs?

A major part of the answer to the above questions remains unanswered; perhaps the banks will be called upon to answer it themselves with their own due diligence. It is also worthwhile to remember that while a lot is expected from the banks to rebuild the economy now and the entire system has been functioning almost on a near normal basis during this lockdown there have been hardly any visible public recognition for their efforts. In this fight against COVID 19, while the health workers, administrative and police personnel have been playing a critical role for survival and receiving accolades, the bankers also deserve a pat on their backs in the process of revival.

The Government and RBI would perhaps do well to initiate some measures to boost the sagging morale of bankers in the field. It is also equally significant to appreciate that ultimately it is the depositors’ money which is at stake and whether they will be content with an enhanced insurance cover could be a real guess.