Arun Jaitley, India’s finance minister, speaks during the launch of the Airtel Payments Bank Ltd. in New Delhi. (Photographer: Anindito Mukherjee/Bloomberg)

Minimising Bad Loans Alone Will Ensure Credit Flow, Says Arun Jaitley

Finance Minister Arun Jaitley said minimising bad loans alone can ensure adequate credit flow to small businesses and the troubled non-banking financial companies and solve liquidity concerns, signalling a thaw in its fraught ties with the Reserve Bank of India.

The latest statement from the finance minister aligns with the RBI’s resolve on the issue which has been doggedly pressing for action on high non-performing assets.

The apex bank has also been averse to the government’s demand for special dispensations for small and medium enterprises, NBFCs and the power sector to help boost growth ahead of the April-May hustings.

“To maintain the strength of our banking system and to enable it to help the economy grow, we need to minimise our NPAs,” Jaitley said at the 100th foundation day of the state-run Union Bank of India through a video link.

“It is only a strong banking system that will be able to improve credit in those sectors which really need credit. The MSME (micro, small and medium enterprises) sector needs credit, several other players in the market need credit. NBFCs today need credit because a large part of lending is done by them,” he said.

The system-wide bad loans ratio sniffed at 12 percent as of March quarter, while for some state-run lenders like IDBI Bank, which has been taken over by Life Insurance Corporation of India, had nearly 28 percent of its loans as non-performing as of the June quarter.

Following a massive spike in bad loans, which increased after the note ban and the hasty implementation of the goods and services tax, the RBI in September 2016 brought as many as 11 state-run banks under the prompt corrective action plan framework to bring down NPAs.

This led to a credit crunch in the economy as these banks collectively control one-fifth of the system level credit and deposits, and the crisis was felt the most by small business units. NBFCs controlled more than 13 percent of the system-wide credit market as of March 2018.

The government-appointed non-official director on RBI board S Gurumurthy had been asking for forbearance for MSMEs along with increased credit flow to other critical sectors, according to reports.

Also, other reports said the government wants the RBI to open a special refinance window for NBFCs, mutual funds and housing finance companies which have been under strain since the defaults at the infrastructure lender IL&FS Ltd.

Also read: Raghuram Rajan Says India’s Growth Held Back Due To Demonetisation, GST

Jaitley, however, did not touch upon other contentious points like passing of the RBI’s surplus capital to government or diluting the prompt corrective action framework for some sector like power which is partly linked to NPAs or lowering banks’ capital buffers.

“The future of our economy and its growth depends on this lending capacity,” he said, adding the “immediate target” should be to strengthen the banking system that is mired with over Rs 10.5 lakh crore in NPAs.

Jaitley said multiple options have been exercised, not many yielded results and the “experiments” being carried out now are delivering results now such as the Insolvency Bankruptcy Code.

The minister reiterated that excessive lending between 2008 and 2014 is the reason for high NPAs now and termed their concealment as a “fatal” error, but spared a direct mention of the RBI this time.

Jaitley also complemented the Monetary Policy Committee for the good work and hoped that it will continue to better on it in the future.

The poll-bound government primarily wants the RBI to help the struggling non-bank lenders get some liquidity support, liberalise the prompt corrective action norms and undertake other measures which will help push growth, while the RBI is said to betaking a conservative view and avoiding any bad precedents.

The RBI’s perceived excess capital has also become into a contentious issue, with one report saying the government is eyeing one-third of its Rs 3.6 lakh crore.

Economic Affairs Secretary SC Garg had last week denied the amount, but said a discussion on “appropriate economic capital framework” for the RBI is underway.

The central bank took its reservations on various issues public in a speech by Deputy Governor Viral Acharya on Oct. 26, wherein he warned of investors’ wrath if the RBI’s autonomy is compromised.

Garg, however, had mocked the “wrath of markets” remark by Acharya, pointing out to improvement in financial markets since the speech.

The RBI board is scheduled to meet again on Nov. 19, in what many earlier expected to be a stormy meeting.

At a time the resilient retail segment has been a focus, the finance minister exhorted state-run lenders to look at the needs of all sections of the economy, including in creating infrastructure, helping industry and the entrepreneurs.

“As a public sector bank, you cannot rely on retail alone, you have an onerous responsibility,” he said, adding the government is now targeting to ensure a banking service outlet is available to every citizen within a 5-kilometre radius.

Also read: Capital Framework, Liquidity Issues Likely To Be Discussed In RBI’s Nov. 19 Board Meeting