What industry needs more than additional pools of liquidity is discretion with bank branch managers to decide what kinds of leniency their clients deserve.
RBI has announced new, welcome liquidity support for the economy struggling with the second wave of the pandemic. However, these fall short of what the small and medium industry requires, to cope with pandemic-induced disruptions, reduced capacity utilisation and intermittent demand. As RBI governor said in his statement announcing the latest slew of measures, every day, on average, banks have been shoving back into RBI ₹5.8 lakh crore through the reverse repo window. Credit growth is weak. Giving banks more money to onlend to industry makes for good optics, but does little to push money where it is required.
What industry needs more than additional pools of liquidity is discretion with bank branch managers to decide what kinds of leniency their clients deserve. Right now, what all parameters go into making a loan what is called an SMA1, SMA2 or SMA3 (SMA standing for special mention account and the numbers indicating how many months the loan has been overdue with debt servicing) are determined by software, and bank managers have no effective discretion to override the software-dictated classification. A borrower in good standing in normal times might turn into an SMA because of a local lockdown, because the supply of some vital inputs got disrupted due to restrictions on inter-state movements, or because an export consignment got delayed when the Suez Canal got blocked. Normal banking would allow the manager of the branch that deals with the client the flexibility to accommodate such special circumstances in determining the borrower’s standing. In India, thanks to the potential criminalisation of any banking decision, normal banking has gone on extended leave. RBI and the government must not allow the desire to rid the system of arbitrariness to strip banking of much-needed discretion.
Even as RBI’s heart bleeds for pandemic-stricken small industry, why should it demurely stay away from direct interaction with non-banking finance companies? If it starts buying NBFC paper, banks would follow suit.