Home >Industry >Banking >Govt push for cheaper credit may not yield desired results

India’s latest efforts to make credit easily available to borrowers during the pandemic may fail to reach a large portion of the intended recipients, experts said, with strict loan underwriting policies potentially rendering many borrowers ineligible for loans under the government’s credit guarantee scheme.

On Sunday, the government expanded the ambit of the existing Emergency Credit Line Guarantee Scheme (ECLGS) or the sovereign-backed lending programme to include airlines and hospitals. This scheme, as bankers pointed out, has about 45,000 crore left to be sanctioned till the corpus of 3 trillion is exhausted.

Banks do not want to lend because of the existing risky environment, said Madan Sabnavis, chief economist at Care Ratings.

“This means that merely opening a credit facility may not necessarily mean that people would want to take it," Sabnavis said, adding that, of course, there is a limit to how much direct spending the government can engage in.

The second wave of the pandemic that began in March this year had revived calls for fiscal measures through increased spending, but so far, the government’s strategy has been to push more bank loans to those impacted.

However, the pandemic has forced banks to tighten underwriting policies and while ECLGS credit will be available to the specified sectors owing to the sovereign guarantee, other industries and stressed customers will be left out, pointed out industry experts.

Calls for direct spending notwithstanding, in a recent interview, finance minister Nirmala Sitharaman said that there is no need to rush with an immediate stimulus as Budget announcements are yet to fully seep into the economy.

However, even sectors added to the list, including aviation which is already under high debt, may find it hard to receive its benefits.

“Promoters need to infuse equity and without that, banks feel there is a lack of skin in the game," said Satyendra Pandey, managing partner at aviation advisory firm AT-TV.

While airlines like IndiGo and Tata Group-backed Vistara and AirAsia India are well-placed in terms of funds, the scheme is targeted towards the weaker airlines, which coincidentally asked the government to implement a 50% capacity cap in the face of declining passenger traffic, said Pandey, who had earlier worked with Capa India and GoAir.

The latest steps could also lead to an increase in debt levels of airlines that opt for the ECLGS scheme as most airlines have huge debt levels, a top airline executive said on condition of anonymity.

Meanwhile, the central bank, economists and even industry leaders continue to urge the central government to accelerate spending in the wake of the second wave.

In May last year, the government had announced a stimulus package of 20 trillion for businesses and workers.

However, as of now, there has been no explicit scheme to increase spends or help the urban poor, as the emphasis is more on incentivizing credit.

To be sure, some amount of spending is taking place as the government’s balance with the RBI is dropping.

As on 26 March, its balance with the RBI was estimated to be at 3.5 trillion, which came down to 2.5 trillion by 2 April and a week later, it declined to about 1 trillion, said an economist at a bank, on condition of anonymity.

“The government also faces a huge fiscal burden because of a fall in revenues; therefore, distributing 2.5 trillion wouldn’t have been possible without a credit scheme like ECLGS," said Soumyajit Niyogi, associate director (core analytical group) at India Ratings & Research.

Niyogi said that every scheme has its own challenges, whether to give money directly to the consumer or producer, adding that the credit route is good unless and until there is a situation where borrowers have neither the inclination, nor the means to borrow.

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