What Banks Have Been Equipped To Do, And What They Can Do, To Aid In An Economic Revival

In the context of transmission of interest rates, passing on the low lending rates to borrowers has been rightly emphasised, to ease interest burden on entrepreneurs.Moreso, when the Reserve Bank of India (RBI) has slashed the repo rate to a historic low of 4 per cent signifying further move towards easy money.With a series of liquidity infusing measures, the RBI opened up the floodgates of liquidity running close to Rs.8 trillion.The reverse repo rate has been brought down to 3.35 per cent to dissuade banks from parking excess funds with the RBI, and to channelise it for lending.As a follow up towards a low interest rate regime, State Bank of India (SBI) has brought down savings bank interest rate to 2.75 per cent from 3 per cent, while ICICI Bank is now offering 3.25 per cent to savings bank accounts with balances up to Rs. 50 lakh and 3.5 per cent to accounts maintaining balances of over Rs. 50 lakh.

Interest rates on term deposits have also been brought down.Effective 27 May 2020, SBI has cut interest on fixed deposits (FDs) across all tenures by 40 basis points.The immediate impact of the interest rate cut will be on those depositors who have their Fixed Deposits coming up for renewal in the near future.The one-year SBI FD rate of interest now stands at 5.10 per cent as against 5.50 per cent earlier.Effectively, the cost of deposits of banks will come down to make space to cut lending rates.The minimum balance requirement has also been removed by SBI to help customers facing financial stress.Many banks have followed suit and lowered interest rates on deposits.Interest rates on popular small savings schemes have been cut drastically for the April-June 2020 quarter by the government.Those retiring now will particularly feel the pinch of the cut, with the interest rate for Senior Citizens Savings Scheme falling from 8.6 per cent to 7.4 per cent.The National Savings Certificates (NSC), too, will see rates slide from 7.9 per cent to 6.8 per cent.

With such steady transmission of lower deposit and lending rates, borrowers should be in a better position to avail of bank loans at affordable rates.The floating rate loans to micro and medium entrepreneurs, car, and home loans that are linked to repo rates have automatically gone down.Even one-year median Marginal Cost of Funds based Lending Rates (MCLR) have declined by 90 basis points (one basis point is one hundredth of one per cent) between February 2019 and 15 May 2020, as against a repo rate cut of 115 basis points in the present rate cycle.

The weighted average lending rate (WALR) has cumulatively declined by 114 basis points since February 2020, of which 43 basis points’ decline was in March 2020.But there is a lack of momentum in the offtake of credit at reduced lending rates.The need for banks is to stimulate credit offtake to ensure that the benefit of a stimulus package reaches the target group.With the RBI having provided enough liquidity windows and temporary relaxations in prudential norms, the ecosystem is in harmony with the present priorities of the economy.Banks will have to now move fast to dispense credit.

1. State of bank credit

Bank credit has already gone down from 11.9 per cent in April 2019 to 7.3 per cent in April 2020. In terms of sectoral allocation, credit to agriculture is down to 3.9 per cent, industry to 1.7 per cent, and service sector to 11.2 per cent down from 7.9 per cent, 6.9 per cent and 16.8 per cent recorded during the previous year. Banks are also finding lack of demand for credit, as the industry is yet to gear up to absorb credit due to labour problems and lack of demand for their products/services.

Amid easing of lockdown, the entrepreneurs are now coming to terms with the dire straits and have began to restart the activities, but on a dull note. Even customers are not mustering enough strength to create demand. At this point of time, a helping hand from banks and non-banks by accelerating lending, more particularly to micro, small and medium enterprises (MSMEs) will be critical to revive the economy.

Despite the banking sector already being battered amid the pandemic and consolidation facing unprecedented disruption, they are required to rise to the occasion. Moving from providing basic services during lockdown, banks are now gearing up for providing full-scale services, keeping revival of lending activities at its epicentre. But the causes of concern continue to be the rising Non-Performing Assets (NPAs) from 9.6 per cent in March 2020 that can reach close to 11.5 per cent in the next one year due to added pipeline defaults.

The moratorium of six months and postponement of interest on working capital loans will add to the woes, though they may not technically hurt the credit history of the borrower.Given the business state of the borrowers, it is difficult to estimate whether repayments after six months will be forthcoming.

2. Government-guaranteed MSME bank loans

Besides some individual banks offering special Covid loan support up to 10 per cent of existing loan limits, the government has realised the need to revive the worst affected MSME sector that is crucial for the economy. As part of ‘Atmanirbhar Bharat Abhiyan,’ a government-guaranteed loan is proposed to benefit 45 lakh MSME units. A collateral- free government-guaranteed bank loan of up to 20 per cent of outstanding bank credit as on 29 February 2020 is available to units with turnover up to Rs.100 crore having existing outstanding loans up to Rs.25 crore.

The loan scheme is open up to 31 October 2020 and will have a four-year tenure with a moratorium of 12 months on principal payment.The upper interest rate on the loan is capped at 9.25 per cent, but many banks are prepared to offer it at 7.5 per cent. According to RBI data, the outstanding MSME loans are at Rs.15.74 trillion on 28 February 2020 and Rs. 3 trillion guarantee cover of the government will be able to support all the existing borrowers.

In order to further widen the scope of future lending, the definition of MSME units is also changed from the basis of ‘investment in plant and machinery’ to the basis of ‘investment and turnover’ and combined the manufacturing and service sector.

(a) Investment up to Rs 1 crore and turnover under Rs 5 crore will be micro-units.

(b) Investment of up to Rs 10 crore and turnover under Rs 50 crore will be small businesses.

(c) Investment up to Rs 20 crore and turnover under Rs 100 crore will be Medium Enterprises.

These collective efforts should be able to bail out units suffering with scarcity of funds to restart units.

3. Challenges for banks

The key near-term challenges would include facilitating social distancing at bank branches given the limitations of space. The footfalls of customers may have to be regulated by moving more activities to digital mode, while stretching the bank timings and staggered working hours for employees is also an option. These measures will be able to reduce the crowding at branch at any one point of time to contain the spread of the virus.

Banks should simplify lending procedures, reform-processing methods, rely more on digital information. Supportive loan documents should be accepted and get authenticated on digital mode. More activities may be moved to back offices and centralised loan processing hubs to remotely work to improve speed and operational efficiency in lending activities.Standard operating procedures (SOPs) may be developed to push credit on assembly- line principles.In extraordinary situations, banks need to move above the routine and embrace innovative methods for high-octane credit push.

Banks should be prepared to operate with relatively high NPAs in the current crisis in the near term, but, if lending opportunities and cross connect with deepening customer relationship is fully utilised, banks can build a better-yielding credit portfolio in the long run to improve asset quality. Creating a compatible ecosystem to lend aggressively will be the need of the hour to stimulate the economy. Hence, banks need to work beyond transmission of lending rates and ensure volume of credit flows to industry to stimulate the economy.