Capital for Banks

With the general elections up ahead, the Central government needs to improve the flow of credit to enterprises, particularly those which are small or medium. With former bureaucrat Shaktikanta Das helming the Reserve Bank, the government is in a better position to firm up stressed public sector banks with capital infusion. Having begun a drive since October 2017 to stimulate these PSBs, the government will now distribute the final tranche amounting to Rs 48,239 crore among 12 banks to take them out of RBI’s prompt corrective action (PCA) restrictions. So far, these restrictions had prevented banks from lending unless they improved in managing their non-performing assets (the combined NPA burden of PSBs was 9.62 lakh crore last March). The banks in turn had egged on the government to bring the RBI (then under Urjit Patel) to heel and agree to give up a part of its reserves which were higher than globally accepted norms. After Das took over as RBI Governor, the confrontation has receded. The Reserve Bank has even obliged the government with a cut in repo rate (the rate at which banks borrow from RBI) to 6.25%. It remains to be seen whether Das can make banks pass on the benefit to consumers, which will translate to lower interests (hence monthly instalments) in home, car or personal loans. The complaint is that many banks avoid doing this by making their interest rate fixing mechanism opaque to consumers. Even if the RBI makes the banks play ball, State governments need to take up cudgels too on behalf of consumers. Assam happens to be one State where bank deposits have been rising, but credit flow has not kept pace. To ensure better credit support for small borrowers and boost the State economy, Dispur needs to pro-actively take up the low credit-to-deposit ratio (CDR) with banks.