New Delhi: There is a strong case for the Reserve Bank of India (RBI) to improve banks’ lending capacity by easing regulations as small businesses, the lifeline of the country’s economy, are starved of funds, Swaminathan Gurumurthy, part-time director at the RBI, said on Thursday.
Gurumurthy’s call for the central bank to ease the capital adequacy parameter for banks and lending restrictions on certain weak banks comes at a time of heightened tension between the government and RBI over a host of issues including the liquidity-enhancing measures that New Delhi wants implemented. Gurumurthy backed the government’s stance on issues like improving liquidity for non-banking finance companies, a key source of funds for micro, small and medium enterprises (MSMEs). The RBI’s board will meet next Monday, in which an appropriate economic framework of the central bank will be discussed.
Delivering a lecture on “State of the economy: India and the world" in the capital, Gurumurthy said policy measures like capital adequacy norms have to be framed with the big picture in mind and that there is no need to go a step further to what is global best practice. He said that unlike the US, where businesses prefer to raise capital from the stock market, the main source of funds for businesses in India are banks. Rules that limit access to finance for small businesses will have serious implications for the Indian economy, he said.
“We have to align our rules to the Basel rules. Not more. This should be looked upon as a bank-driven economy," he said, arguing that the minimum total capital to be maintained by banks as a share of their total risk-weighted assets (RWAs) need to be lowered to 8%, against the RBI mandated 9%. This, he said, will enhance banks’ ability to lend.
“We are doing more than what Basel mandates and banks have less money to lend. Why should we? When problems do not exist, we create for ourselves," he said.
Gurumurthy said a key challenge today is access to credit for small businesses, which play a crucial role in the economy. He said that all listed companies contribute only 5% of India’s economic output. All unlisted and listed entities put together account for only 15% of the country’s gross domestic product (GDP). On the other hand, MSMEs account for half of the country’s economic output and 90% of employment and 70% of exports. He said this 50% of economy is starved of money. “It is this sector, lifeline of India, that is starved of credit."
“Once money is released to this sector, growth rate, consumption, and investment will pick up because it is a bottom-up economy. A new thinking is needed. We have to be rooted on the ground," said Gurumurthy.
“In the next one year, we have to cut down current account deficit and trade deficit. All institutions have to work together," he said.