Renewed credit push to informal sector welcome, but banks need to shed conservatism for the proposals to work
The Centre’s credit-driven push to the economy with an eye on the informal sector, has not come a moment too late. It is a tacit acknowledgement that large sections of the working class have been hit by the pandemic’s second surge and may need further support going beyond food and cash transfers. With manifest limits to fiscal support in a situation of creeping inflation and rising global rates, it is only right that the Centre should resort to a credit-driven relief. How well these measures work, though, will be determined by the banks. Apart from creating health infrastructure of ₹50,000 crore through loan guarantees, the rest of the economy will be supported with another ₹60,000 crore of guarantees. The Emergency Credit Linked Guarantee Scheme’s limit has been enhanced to ₹4.5 lakh crore, from ₹3 lakh crore, giving banks extra elbow-room to disburse credit. Contact-intensive sectors in urban areas cannot be easily supported through fiscal transfers; hence a liquidity line to help them survive makes sense.
The new credit guarantee scheme for microfinance institutions (MFIs) appears to be aimed at reaching out to borrowers who have been excluded from the ECLGS. It offers commercial banks credit guarantees of ₹7,500 crore to open their credit taps to microfinance institutions, who are in turn expected to disburse small-ticket loans to 25 lakh borrowers. The MFI space is better regulated than a decade ago and does cater to the right target segments. But with credit being routed through two layers of intermediaries — banks and MFIs — it needs to be seen if it reaches the ultimate beneficiaries. In its efforts to reach out to the unbanked, the banking system should consider promoting a credit card or overdraft model in vogue in the organised retail and industrial sectors, which permits a rollover of the principal. The present insistence on total repayment may force sections with uncertain income flows to fall back on informal lenders. On ECLGS, there is some evidence to show that the bulk of loans already disbursed may have gone more to medium or large enterprises, rather than micro ones. A recent survey by the Consortium of Indian Associations covering 81,000 small businesses had found that 88 per cent of them hadn’t received benefits from the stimulus so far, as they either found the banks’’ procedural requirements too daunting or that banks preferred borrowers who used it to settle older dues.
In its omnibus package, the Centre has done well to extend its EPFO subsidy till the end of this fiscal. This will dissuade job layoffs. A focus on job preservation in Covid-hit sectors, seen by measures to support tour guides and hotels, and an effort at targeted interventions is a notable feature of Monday’s announcement. However, banks need to shed their risk aversion. The RBI has given them, through the TLTRO window, a surfeit of medium-term funds and they need to step up to the plate.