Watch out for a silent build-up of bad assets
SummaryBanks’ gross NPA ratio decline of 2021 was not just because of better recoveries but partly thanks to relaxed regulatory norms that offered them leeway not to classify loans as such.
The Reserve Bank of India (RBI) has the unenviable job of choosing to fight inflation or promote economic growth. In the era of multi-objective multi-instrument monetary policymaking, there was an inbuilt trade-off in the objectives. The trade-off might not have been fully transparent, but by and large, there was enough manoeuvring room. Since 2016, we have had the Monetary Policy Committee (MPC) regime, with a single mandate of targeting inflation to keep it between 2% and 6%. This is as per a contract between the central bank and the government. Failure to meet this flexible target for three successive quarters calls for the offending party (i.e., the MPC or RBI itself) to explain the failure. The MPC has been ultra-accommodative for nearly four years, since much before the pandemic’s onset. During the worst phase of the pandemic, monetary policy was used to the hilt. The Prime Minister’s Atmanirbhar Bharat Abhiyan relief package, placed at 10% of India’s GDP, was nearly all in terms of either liquidity injection or loan guarantees, or some loan restructuring. The fiscal restraint on display then did not prevent the fiscal deficit from hitting 9.5% of GDP during fiscal 2020-21. With loss of incomes and livelihoods, it was no surprise that there was initially lukewarm demand from small entrepreneurs for state-guaranteed loans. It took a while for credit offtake under the Emergency Credit Line Guarantee Scheme (ECLGS) to cross ₹2 trillion. With hindsight, that is not surprising. When business comes to a halt, a fresh loan, even if guaranteed partially by the government, is hardly the top priority.