Credit flow: Rs 4L crore reverse repo funds sanctioned as loans

RBI data show banks have parked Rs 6.3 lakh crore under the reverse repo route.

Sanctioned loans account for well over a half of the funds parked by banks with the central bank under the reverse repo route and disbursement is being delayed, as borrowers want money only after the lockdown is lifted, a highly-placed official source said on Friday, asserting that credit flow hasn’t been choked even during the pandemic. Sanctioned loans stood at about Rs 4 lakh crore, while latest RBI data show banks have parked Rs 6.3 lakh crore under the reverse repo route.

While the Indian Banks’ Association (IBA) has suggested that a bad bank be set up to tackle a potentially massive spike in non-performing assets (NPAs) in the wake of the pandemic, the government hasn’t “moved on the proposal”, according to the source. Sources had earlier told FE that the government, instead, wanted to first ensure structural reforms were initiated in the asset reconstruction space to boost the performance of existing companies. Else, adding a public-sector ARC to the already-existing 29 of them won’t be of much gain and the same systemic issues will continue to weigh on its performance.

Commenting on the job losses and salary cuts following the Covid-induced lockdown, the source said the finance ministry is engaging with the labour ministry to ensure what best can be done on this issue. The labour ministry is compiling data on the job losses and salary cuts.

Asked about the possibility of restricting Chinese investment via FPO (foreign portfolio investment) route, the source said a decision is yet to be made. As the Covid-19 outbreak had severely hit the liquidity position of many domestic firms, making them easy prey for cash-rich Chinese investors, the government last month tightened its foreign direct investment (FDI) policy to curb “opportunistic takeovers/acquisitions” by entities in bordering nations. Any FDI proposal by investors from the bordering countries (including China) will now require government clearance, even if foreign investments for that sector are placed under the automatic route.

The GST Council will next meet in June, the source said. However, it’s early to say whether GST rates will be raised to earn more revenue at a time when the pandemic has severely strained the finances of both the Centre and states.

The Rs 21-lakh-crore relief package is aimed at reviving the economy that has been ravaged by the pandemic, said the source, adding that the measures announced to support MSMEs will help small businesses across sectors, including the ones that have been battered by the Covid-19 outbreak. So, to suggest that critical sectors, especially tourism, were left out of the relief package is fallacious, the source indicated.

As for credit flow, the government expects disbursement to pick up pace once operations of companies return to normalcy with the lifting of lockdown. Having risen at a double-digit pace in FY19, non-food credit growth faltered last fiscal. Even before the Covid-19 started to spread, non-food credit growth crashed to just 6.3% year-on-year in the fortnight through February 14, the lowest since May 2017, mirroring a broader economic slowdown and risk aversion among bankers. The credit growth stood at 6.67% in the fortnight ended April 24. However, this is set to change in the coming quarter.

Since the loans have to be disbursed soon, banks perhaps think it is wise to park the funds with the RBI under the reverse repo route so that at least they will earn some interest on it in the interim period, the source said. The reverse repo rate currently stands at 3.35%.

As such, under the relief package, the government has already announced up to Rs 3-lakh-crore, collateral-free, extra loan for MSMEs with full official guarantee, Rs 75,000-crore liquidity facilities for shadow lenders and a Rs 2-lakh-crore loan facility for farmers who don’t have Kisan credit card, among others. All these measures, coupled with the steps declared by the central bank, will spur economic growth in the coming months, the government expects.