Note ban will not revive banks

Contrary to the expectations of at least a 25 basis points (bps) cut in the policy interest rate, the Reserve Bank of India has not obliged the borrowers even with a small mercy. Instead, the RBI has decided to shift gears from an “accommodative” to “neutral” stance while Governor Urjit Patel is nudging banks to pass on some of the 75-80 bps cornered from the 175 bps reduction in the benchmark rate already announced since January 2015. Prime Minister Narendra Modi and Finance Minister Arun Jaitley have been defending the demonetisation of high-value currency notes as a pro-people decision since the banks would be able to lend at much lower rates with so much cash in their chests. But the RBI which has suffered a huge credibility gap following the demonetisation debacle, has not done so through the monetary tool of short-term lending rate, known as Repo in banking parlance, keeping it unchanged at 6.25%. Along with the RBI, the government is also facing credibility gap as what it said about rate cut has not happened.

Ironically, while the Monetary Policy Committee clearly saw an “output gap play out” or in other words, disruption in production, the RBI governor was not willing to share information on the mop-up of demonetised currency, without giving any plausible reason for an act that resulted in immense loss to industry, trade and employment. Keeping such a vital information secret would give rise to doubts over all this talk about windfall from the massive exercise that kept changing the goal posts from eliminating black money and corruption to digital economy, leading to a cashless society. Besides, the public at large was fed with a promise of sharp cuts in cost of borrowing as a consequence of the cash pile with the banks.

But lending is not that simple. Banks have to operate under the global lending norms and can lend up to a point, permitted by the capital adequacy ratio. In a scenario where almost all the public sector banks are under-capitalised, the Budget has provided only Rs 10,000 crore for recapitalisation far below the requirement. Moreover, inflation targeting of 4%, which is the principal mandate of the central bank, cannot be brushed aside. The RBI has conveyed in clear terms that it can do only this much and it is up to the government to take enabling steps for a ramp up in credit growth and revival of the economy. The key conditions for an uptick in lending include quick resolution of non-performing assets, re-capitalisation of banks and further cuts in small saving rates. The ball has been thrown in to the government’s court which will find it hard to play.