Boosting Loan Disbursements

To quote from today's Financial Express:

 “The loan growth has all been sluggish. The increase in non-food credit was flat at 0.1% between March and September this year, even over a longer period in the year to September 24, the growth is modest 6.8%. Again, much of this has been in the form of retail loans because banks claim that there is little demand from the companies. To be sure, there has been a fair bit of disbursement under the Emergency Credit Line Guarantee Scheme- the scheme promoted by the government to help MSME’s, a chunky 3.5 – 4 lakh crores has been lent to smaller companies. Even if banks fear that some of this may not come back – the government offers only a partial guarantee- they have been fairly enthusiastic about the ELCGS because the government has backed the scheme.

As such when risk aversion is running high, the government probably needs to initiate more of such schemes. There are those who will argue that it has a fiscal cost, in the event some of the bad loans go bad, and, therefore, risky. But, it is a risk worth taking because it could create a virtuous cycle and give the nascent recovery the necessary push. The fact is that bankers remain wary, even scared, of taking risks; they are reluctant to lend to companies with a credit rating below AA. They have made it amply clear that they do not intend to take even the smallest risks. While it is their business to take calculated and measured risks, the problem is they fear harassment in the event an exposure goes bad. Given how some banking executives have been treated so badly, it is a justified fear.

 

Last week, the finance ministry came up with accountability guidelines – for loans that carry some risk of default- to help ease the anxiety at public sector banks. From April next year, public sector bankers will not be held accountable for 'bonafide’ loans of upto Rs. 50 crores going bad. Moreover, banks have been given some flexibility on the scrutiny of smaller assets – in the region of 10-20 lakhs. These guidelines are helpful, but the threshold needs to be raised. While we cannot have malfeasance, bankers cannot be harassed and taken to task for every loan that goes bad. If the government wants to push credit, it needs to reassure bankers it is taking legislative steps to protect them. The level of risk aversion is threatening credit flows that cannot be good for the economy.”   

 

A key solution to this vexed challenge lies in a tie-up with some of the reputed management consultancies, which can can lend confidence to the banks. This would be by offering their services for some of their loan borrowers, who may be in need of expert advice to make best possible use of the loans so borrowed. So besides loans, the banking sector can also offer hand holding services to some of its borrowers via such kind of a tie-up with reputed management consultancies. Those borrowers availing of such services can possibly be given a preferred rate of interest by the banks, due to relatively low level of risk of defaulting.

 

Thus, while such a tie-up can prevent some loan borrowers of the banking system from turning into NPAs, thus proactively addressing “twin balance sheet problem”, it would also help such loan borrowers avoid insolvency related procedures which may even threaten the very existence of such businesses. Reputed management consultancies can keep the banks posted regarding the overall progress of such loan borrowers post disbursal of loans to them, so that there are no negative surprises when it comes to repayment of such loans. 

 

On a positive note, some of such loan borrowers can also be hand-held towards a better path to progress, which in-turn would also benefit the banking system via getting timely repayments of interest and the principal amounts due, besides significantly contributing to our overall economic revival.

 

For such reputed management consultancies, the benefit would chiefly be in terms of greater market penetration, adding to its revenues through fees from the banks with whom such a tie-up is made, as well as some of their loan borrowers which avail of such services.

 

Thus, such an arrangement would be a ‘win-win-win’ for all the three participants, that is- the banking system, reputed management consultancies so associated, and the loan borrowers. Attendant multiplier effects in the economy as a whole in terms of greater employment, boost in overall demand, improved tax collections etc, would be a natural by-product of such an arrangement.