What is the news?
Union Finance Minister recently asked public sector banks (PSBs) to give credit through outreach programmes in every district of the county and referred to the 2019 “loan melas” undertaken by banks across 400 districts.
Finance Minister also asked PSBs to reach out to different sectors to address their needs. The idea clearly is to keep the economic recovery going.
Although economic activity has recovered with a decline in Covid-19 cases, the overall demand condition in the economy is weak.
Hence, a higher flow of credit to various segments of the economy will help push consumption and investment.
Why credit offtake is weak in India?
Credit offtake means demand for credit. Slow growth of credit offtake is due to the following reasons:
- First, the overall demand is weak and there is spare capacity in the system. Hence, companies are unwilling to invest significantly at this stage.
- Second, lower overall demand and capacity utilisation mean that the demand for working capital is also low.
- Third, firms that have capital needs are raising funds from the market through debt and equity due to lower interest rates and significantly higher liquidity. It is easier for firms to raise money from the debt market.
- Read here: Financial markets in India – Explained
- Fourth, with higher profits and improved balance sheets, the corporate sector is expected to be able to meet investment needs through internal accruals to some extent.
- Fifth, consumers are also not keen to borrow at the moment. The decline in income because of Covid-related disruption and the given medium-term economic uncertainty are unlikely to encourage households to accumulate more debt.
- Lastly, PSBs are not known for following very high lending standards. They get further compromised when banks are directed to lend by the government. The objective of managers in PSBs shifts from quality to meeting lending targets. This affects the overall asset quality and lending capacity of PSBs. A higher level of non-performing assets then requires capital infusion from the government.
Hence, in the given circumstance, the idea of pushing credit is unlikely to work and the government must stop treating PSBs as an extension of the finance ministry. For now, the policy priority should be to start the bank privatisation process.