Banks Reluctant To Lend NBFCs Despite Surplus Liquidity, Says Finance Ministry

Banks were reluctant to lend to shadow lenders in April despite excessive liquidity in the system, and parked their funds with the Reserve Bank of India, the finance ministry said.

In the macroeconomic report for April, the ministry said banks were risk averse, and parked a staggering Rs 7.4 lakh crore with the RBI under its reverse repo window despite an unattractive interest rate of 3.5 percent.

To provide liquidity support to non-bank lenders and micro lenders, Finance Minister Nirmala Sitharaman announced a special liquidity window for shadow lenders where a special purpose vehicle would invest in their short-term debt.

Although RBI’s sustained liquidity operations flushed the Indian banking system with liquidity in April 2020, banks’ response remained lukewarm, and credit to commercial sector continued to see muted growth.

Bank credit growth recorded a 0.7 percent decline in the fortnight ending April 24, 2020, over the previous two weeks. Bank credit to commercial sector also fell by 0.7 percent during the same period compared to the previous fortnight.

Growth To Revive

The government is aware of the severity of lockdown on economic activity in the country, and is “cautiously optimistic” about the revival of growth later in the year, the report said. This is despite the International Monetary Fund projecting a 1.9 percent growth in 2020-21, and 7.4 percent a year later.

However, downside risks to India’s growth emerge due to high possibility of global slowdown and supply chain disruptions, the report said.

“Downside risks to India’s growth emerge from the high possibility of global slowdown deepening and supply chain disruptions getting exacerbated due to prolonged spread of Covid-19 and lockdowns across countries,” the report said.