RBI'S BLOCKED TAP

The traditional approach of pumping money into banks to push liquidity to corporates and NBFCs is not working. It’s time to change the strategy

- ANAND ADHIKARI

Reserve Bank of India (RBI) Governor Shaktikanta Das said in a recent interview that banks were not willing to take credit risk beyond a point. The reason: The ₹3.74 lakh crore surplus liquidity was not reaching those hit hardest by the current crisis — non-banking financial companies (NBFCs), microfinance institutions (MFIs), micro, small and medium enterprises (MSMEs) and mutual funds.

In fact, there was no dearth of liquidity in the banking system even pre-Covid. Risk-averse bankers were happily depositing funds back with the RBI and earning riskfree returns. The bankers' retort was, why should one take credit risk in a slowing economy? Similarly, when over ₹1 lakh crore was pumped in by the RBI to encourage banks to buy corporate bonds, bankers invested the money in PSU bonds, and made a killing. Outsmarted twice, the RBI is now reviewing the situation before deciding its next course of action. Das’ words carry a subtle message – the Centre needs to step in urgently to create confidence among banks to lend. Companies are gasping for funds, and left to fend for themselves, may go bankrupt.

But not everyone agrees. “This is an unconventional war on the economy. A traditional blanket liquidity measure will not work as some will not get the benefit at all, while some others may get more benefit,” says Arun Singh, Chief Economist at Dun & Bradstreet. “The risk capital in the system is very low. The surplus liquidity will not naturally convert to either lending beyond a particular risk profile or investing beyond a particular risk profile,” says Suyash Choudhary, Head (Fixed Income) at IDFC AMC.

First-loan loss direct guarantee by government for Covid-impacted segments

An SPV to house a government-sponsored fund