Govt’s third stimulus package can potentially backfire for lenders

The government yet again has relied on India’s financial intermediaries in giving a third booster shot to the economy already on a recovery path.

The Aatmanirbhar Bharat package 3.0 announced on Thursday had 12 measures focused on employment generation, boosting manufacturing activity, aiding rural recovery and lifting up the sagging realty sector.

But the credit element was unmistakably there. The support totalled ₹2.65 trillion, but economists said 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) till March 2021 and the announcement of a new scheme for 26 sectors.

Under this new credit scheme, banks will be able to lend to stressed companies from 26 sectors identified by the K.V. 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 will 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 the loans without collateral and with credit risk fully borne by the government. What’s more is that the companies can get a one-year moratorium on 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 for up to 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 warned 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 banks towards accelerated lending to the pandemic-impacted sectors,” wrote Sujan Hajra, chief economist, Anand Rathi Securities in an e-mail response.

Moreover, the one-year moratorium will 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 nearly 2% down, even though the broader market recovered.