Govt push for mandatory bank loans needed to help small borrowers tide over COVID-19 financial emergency

A mandatory offer of credit is not outrageous in the present circumstances

On April 23, bankers effectively told the Reserve Bank of India (RBI) they cannot take the risk of lending to small borrowers. How they did it needs a long explanation, which is outside the scope of this commentary. Suffice to say that they said they cannot take money from the RBI with a commitment to lend to microfinance institutions, to small business, shops and so on.

Labourers for instance, who work in small units that litter towns, like grocers, tentwallahs, milk carts etc. will have to wait longer. These units need cash badly, but the non-banking financial companies (NBFCs) which finance them cannot get money from the banks. The banks are not interested.

This is a massive crisis in the COVID-19 pandemic. Cash, in whatever form digital or as currency notes, is king in emergencies. Any homemaker understands this. And COVID-19 is one long emergency, both medical and financial. It stands to reason that if the economy has to come out of this financial emergency, most of its enterprises, formal and informal like our farmers will need cash, in other words, liquidity.

The one agency which can make good this liquidity are the Indian banks. It is not that they cannot do so. Yet they have told the RBI they are unwilling to lend because the risk of lending to small entities has gone up. A data point will make this clear. As of April 17, the banks have parked Rs 6.9 lakh crore with RBI, earning a decent rate of interest of 4 percent, instead of making any effort to lend. The sum parked with RBI is about 6.7 percent of total bank credit outstanding in the economy at the end of March 2020. If released into the economy, a lot of distress could have been wiped out.

The banks have a simple logic for their extreme risk aversion. They know that the companies and unincorporated enterprises like small scale manufacturing units or shops or farmers, essentially all those who need cash, are in potential trouble. Despite the help from banks many of them will not make it. There is no way to mount a counter-argument that these losses will not happen. The banks worry that they shall be made scapegoats if these losses happen, just as they were supposedly made responsible for the loans they gave out to bring the economy out of trouble, post the 2008-09 global financial meltdown.

Yet, it is impossible for the Indian government to offer any succour to any sector without involving the banks in the picture. Should one suggest that the best option at this juncture is to make it mandatory for banks to offer loans to all customers who approach them now? They should not have the discretion to refuse any plea. Do understand this is not like a national loan mela where all interest is waived off.

What this policy would do is waive the option for the banks to pick and choose the winners. It is the losers who need support now. It is a suggestion that was first mooted by Pronab Sen, former chief statistician of India. Sen has been with the erstwhile Planning Commission for decades where he also wrote the 10th Five Year Plan, so he knows the typical mindset of the Indian banking sector.

A mandatory offer of credit is therefore not outrageous. It will simply mean a banker will be offered almost no option to turn down a loan in the present circumstances. Such a step needs the intervention of the Finance Ministry and not the RBI. The latter is the regulator and it can only nudge the banks in a particular direction. It cannot ask banks to do any more. Decisions of the boardrooms have to be decided by shareholders, in this case, the majority owner, the Government of India, to make working capital loans available on a massive scale. Once it is done, the money will flow easily to all concerned. The shareholders can easily decide on a waterfall mechanism to help small and micro enterprises at first, and only then decide to offer loans to larger enterprises.

What are the risks? There is the apprehension that someone who is unscrupulous will fatten himself. It is possible. But let us examine the counterfactual: Business of all sorts have already begun to petition the government for similar support. If the government accepts the plea of any sector how would it work out? In all probability, the government will offer a sliver of budget support to be topped up generously by bank loans. All those loans will have to be a) based on subjective assessment and b) discriminate among some.

Such an option is more prone to abuse by the unscrupulous. Each such loan will immediately carry the taint of crony capitalism. How is the voter, when evaluating the government’s record, supposed to understand that Sector A is more affected than Sector B when the crash is so massive?

Instead, if loans from banks are made mandatory, subject to a thin set of guidelines, they shall be sector agnostic. The administrative pressure on the banks will be far less. They shall not have to worry about assessing firms sector-wise, to make the case for budget support from the government. This is a huge relief at a time when most of these banks have merged less than a month ago. The officers from the different organisations are not even familiar with their counterparts, across the desk. There is no option at this time other than to offer a simple and transparent scheme like mandatory loans to make the banks reach out to the public.

It would be particularly useful as it will take the sting away from the ‘Triple C’—Comptroller and Auditor General of India (CAG), Central Vigilance Commission (CVC) and Central Bureau of Investigation (CBI) at this juncture. When mandated by the government, banks won’t be questioned. The banks will just be the implementing agencies and can go about their task without fear or favour.

(The writer is a business journalist and can be reached at [e-mail])

Disclaimer: The views expressed above are the author’s own. They do not necessarily reflect the views of DH.