The government’s announcement finally that it would infuse Rs 70,000 crore over four years into the public sector banks, where it is the majority owner, has been widely welcomed though it would solve just a part of the problem faced by the PSBs. The RBI governor, Dr Raghuram Rajan, has also welcomed it, saying it is a “good beginning”. The money will be dispensed in tranches — Rs 25,000 crore this fiscal, Rs 25,000 in 2017, and followed by Rs 10,000 crore in each of the remaining two years. The banks require a total of Rs 1,80,000 crore but the Rs 70,000 crore gives them some breathing space to deal with their non-performing assets.
Ironically, much of the money, in a way, goes back to the government as banks invest heavily in government securities. According to one report, of the total Rs 5.73 lakh crore credit expansion in 2015-16, investment in government securities increased by Rs 3.53 lakh crore. Whether this infusion will help credit growth is difficult to say. Of the Rs 25,000 crore, Rs 10,000 crore will go to the top six lenders since they are the backbone of lending in the economy, and Rs 10,000 crore would be provided to the weaker banks.
Some bankers attribute the tepid growth in lending to lack of funds primarily faced by the weaker banks and to high provisioning for NPAs, but others say that credit growth will pick up only if there is investment, and investment has yet to pick up. The RBI governor has always said that there is enough liquidity in the system. Credit growth is estimated to be a mere 9.4 per cent in the year to July, and much of the growth has been boosted by a rise in personal loans which has been a healthy 16.5 per cent.
The poorest credit growth has been to the small and medium sectors which desperately need huge funds but do not have the collateral to cushion their borrowing. The PSBs are in a kind of vicious circle. They have huge NPAs because much of the money loaned is stuck in infrastructure projects which have yet to take off as they are pending clearance by the government. The government in the last one year has cleared some projects but there are lakhs of rupees worth of projects waiting to be cleared.
Most companies are heavily leveraged so cannot borrow to make new investments. The government has yet to find a solution to this latter problem. Unless it does this, new investments cannot come up and banks cannot lend to them. Banks are also having a problem selling their non-performing assets. The Rs 25,000 crore to be pumped in by the government by September for this fiscal is a breather for all involved in finding a long-term solution.
