Excess liquidity in banking system should flow to industry, Banks are sitting on Rs. 6.92 lakh crore worth of liquidity, which is 3.5% of GDP

MUMBAI, 17th April 2020 (GNI): Reserve Bank of India (RBI) has taken several steps today to discourage banks from sitting on idle cash and instead use them for lending to MSMEs and large industries.

Speaking on the measures taken by RBI today, Ms. Rupa Naik, Senior Director, MVIRDC World Trade Center Mumbai said, ““Banks are risk averse to lend to the industry in the current circumstances and hence they are sitting on excess cash worth around Rs. 6.92 lakh crore, which amounts to 3.5% of India’s GDP. Banks are depositing this cash with RBI under the reverse repo window for 4% interest rate, instead of lending to industry. Today, RBI reduced this interest rate by 25 basis points to 3.75% to discourage such deposits. However, more measures need to be taken to take bankers to confidence.”

Even though the banking system is flush with liquidity, banks are risk averse to lend it to industry. As a result, even a AAA rated company (company with sound credit rating) is unable to raise funds at interest rate below 8%. This is despite the fact that RBI’s repo rate, the main policy rate at which the central bank lends to banks, has been reduced to 4.4% on March 27, 2020.

In order to infuse confidence among banks and encourage them to lend to industry, Ms. Naik suggested various measures. She suggested that the government should provide first loss guarantee of say 20% on loans extended by banks to MSMEs. This means, the government should provide guarantee for the first 20% of the default by borrowers on incremental loans offered by banks. Many countries in Europe and elsewhere have offered guarantee against loans extended by financial institutions to industry.

Another suggestion offered by the Senior Director is to increase the corpus of CREDIT GUARANTEE FUND TRUST FOR MICRO AND SMALL ENTERPRISES (CGTMSE) scheme, under which banks provide collateral-free loans to MSMEs. Increasing the corpus will enable more MSMEs to benefit by availing collateral-free loans under this scheme.

The government and RBI should hold a closed door meeting with senior officials of public sector banks and encourage them to lend to the industry. These are extraordinary times, which require extraordinary support from financial institutions to the corporate sector.

Meanwhile, Ms. Naik welcomed the other measures taken by RBI today to encourage flow of bank funding to the industry. These measures include additional targeted liquidity infusion window (LTRO) with the condition that banks lend 50% of this funds to mid and small sized NBFCs and micro finance institutions. The RBI also offered special refinance facilities to NABARD, SIDBI and NHB to promote flow of funds to agriculture, MSMEs and real estate sectors.

Ms. Naik suggested that the government should raise additional resources from the market in this extraordinary situation to fund the relief measures. “The government may raise around Rs. 1 lakh crore through issuance of tax-free COVID-19 bonds or National Health Emergency Bond to tide over the fiscal constraint in the present circumstances,” stated in the press release. ends