Govt’s third stimulus bundle can doubtlessly backfire for lenders

Public sector banks (MINT_PRINT)

The federal government but once more has relied on India’s monetary intermediaries in giving a 3rd booster shot to the economic system already on a restoration path.

The Aatmanirbhar Bharat bundle 3.0 introduced on Thursday had 12 measures targeted on employment era, boosting manufacturing exercise, aiding rural restoration and lifting up the sagging realty sector.

However the credit score ingredient was unmistakably there. The help totalled 2.65 trillion, however economists mentioned the precise fiscal value can be lower than half of this.

Two huge measures had been the extension of the present emergency credit score line assure scheme (ECLGS) until March 2021 and the announcement of a brand new scheme for 26 sectors.

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Underneath this new credit score scheme, banks will have the ability to lend to confused corporations from 26 sectors recognized by the Ok.V. Kamath committee earlier this yr.

The circumstances are that such corporations mustn’t have repayments overdue past 30 days as of February-end. Firms in these sectors might be allowed to stand up to twenty% of their mortgage excellent as of February as contemporary credit score totally assured by the federal government. Lenders can prolong the loans with out collateral and with credit score threat totally borne by the federal government. What’s extra is that the businesses can get a one-year moratorium on reimbursement of the principal.

On the face of it, this appears to be a dream lending alternative for banks. Banks can earn curiosity on these loans for as much as 5 years, the place threat is totally borne by the federal government. It’s virtually just like investing in authorities bonds, however with a excessive yield. It’s a win-win as banks get to take no threat whereas struggling corporations get the much-needed funds.

However seldom are lending selections so easy and binary.

The initially envisaged credit score assure scheme with a goal disbursement of 3 trillion has seen nearly half of the quantity being lent out by banks. This exhibits that regardless of low threat, banks are uncomfortable to lend.

Analysts warned that forcing banks to lend to corporations the place assessing threat has turn out to be a problem because of the pandemic places banks at an even bigger threat, credit score assure or not. “The announcement right this moment can doubtlessly be destructive for the financials if the federal government and the Reserve Financial institution of India resorts to ethical suasion or extra direct measures to nudge banks in the direction of accelerated lending to the pandemic-impacted sectors,” wrote Sujan Hajra, chief economist, Anand Rathi Securities in an e-mail response.

Furthermore, the one-year moratorium will cloud the standard of credit score. Maybe, these dangers made buyers cautious as financial institution shares weren’t precisely enthused by Thursday’s measures. The Nifty Financial institution index ended almost 2% down, despite the fact that the broader market recovered.

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