Government’s third stimulus shot could backfire on banks

The Atmanirbhar Bharat package 3.0 announced on Thursday had 12 measures focused on employment generation, boost manufacturing activity, aid rural recovery and lift up the sagging real estate sector. But the credit element was unmistakably there. The support totalled ₹2.65 trillion, but economists believe that the actual fiscal cost would be less than half of this.

Two big measures were the extension of the existing emergency credit line guarantee scheme (ECLGS) to March 2021 and the announcement of a new scheme for 26 sectors.

Under this new credit scheme, banks would be able to lend stressed companies from 26 sectors identified by the KV Kamath committee earlier this year. The conditions are that such companies should not have repayments overdue beyond 30 days as of February end. Companies in these sectors would be allowed to get up to 20% of their loan outstanding as of February as fresh credit fully guaranteed by the government. Lenders can extend these loans without collateral and with credit risk fully borne by the government. What’s more is that these companies can get a one-year moratorium on the repayment of the principal.

On the face of it, this seems to be a dream lending opportunity for banks. Banks can earn interest on these loans of upto five years, where risk is fully borne by the government. It is almost similar to investing in government bonds but with a high yield. It is a win-win as banks get to take no risk while struggling companies get the much needed funds.

But seldom are lending decisions so simple and binary.

The originally envisaged credit guarantee scheme with a target disbursement of ₹3 trillion has seen just about half of the amount being lent out by banks. This shows that despite low risk, banks are uncomfortable to lend. Analysts warn that forcing banks to lend to companies where assessing risk has become a challenge due to the pandemic puts banks at a bigger risk, credit guarantee or not. “The announcement today can potentially be negative for the financials if the government and the Reserve Bank of India resorts to moral suasion or more direct measures to nudge bank towards accelerated lending to the pandemic impacted sectors,” said Sujan Hajra, chief economist at Anand Rathi Securities in an email.

Moreover, the one-year moratorium would cloud the quality of credit. Perhaps these risks made investors wary as bank shares weren’t exactly enthused by Thursday’s measures. The Nifty Bank index ended down nearly 2% even though broad market recovered.