ADVERTISEMENT

India Unveils Steps for Bad Loan-Laden Banks to Boost Credit

India Unveils Steps for Bad Loan-Laden Banks to Boost Credit

(Bloomberg) --

India’s central bank unveiled steps to encourage banks to lend more to small businesses and home buyers in a bid to spur credit growth in the struggling economy.

Banks will be exempt from setting aside the mandatory cash reserve ratio of 4% of fresh loans for automobiles, residential housing and small businesses until July 31, the Reserve Bank of India said Thursday. It also extended a relaxation of rules on the classification of loans and introduced a 1 trillion rupee ($14 billion) facility for banks to borrow cheaply from the central bank.

Loan growth is set to slow to a 58-year low of around 6.5% in the year through March as lenders battle the world’s steepest bad-debt ratio. A prolonged shadow banking crisis and the slowest economic expansion in more than a decade have also made banks wary of lending to companies.

India Unveils Steps for Bad Loan-Laden Banks to Boost Credit

The Bankex index of bank stocks rose as much as 1.5% after the announcement, and the S&P BSE Finance index, which includes non-bank financial firms, climbed 1.6%.

“The Reserve Bank is actively engaged in revitalizing the flow of bank credit to productive sectors having multiplier effects to support impulses of growth,” the central bank said after keeping interest rates unchanged.

In a move to bring down banks’ funding costs and lend at a lower rate, the RBI’s new liquidity facility will allow them to borrow from the central bank for one and three years at 5.15%.

“After a while we are seeing a credit policy more than a monetary policy,” R. Sivakumar, a fund manager at Axis Asset Management Co., wrote in a Twitter post.

The RBI extended asset classification relaxations by one more year for small businesses that have defaulted, and for commercial real estate borrowers where the project has been delayed “beyond the control” of the owner of the company. Banks are allowed to mark these loans as performing instead of downgrading them, which would have required them to set aside more capital.

--With assistance from Ronojoy Mazumdar.

To contact the reporter on this story: Suvashree Ghosh in Mumbai at sghosh186@bloomberg.net

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Russell Ward, Arijit Ghosh

©2020 Bloomberg L.P.