Home / Opinion / Quick Edit /  Opinion | Sitharaman’s credit nudge

Loan seekers have some cause for cheer. Finance minister Nirmala Sitharaman has announced that 70,000 crore set aside by the government’s budget for the recapitalization of state-owned banks shall be done rightaway. Her message is clear: Lenders need not hold back on advancing loans to deserving borrowers. If they need money now, they should get it now. The declaration comes as part of a series of measures being taken to help the economy tide over its current woes, a significant fraction of which can be traced to a credit crunch.

That Indian banks are starved of capital has been a cause for much anxiety in financial circles. The basic problem is not new, even if groans over it seem to have grown louder in recent months. Ever since the previous decade’s credit boom ended in a blowout, leaving behind a trail of rotten loans that ate into the capital buffers that banks had, the government has had to periodically put more funds into banks just to ensure that these cushions met global norms. Despite the infusions, though, state-owned banks have struggled to reduce their dud loans as a proportion of their total advances.

Capital cushion rules for banks are set to get stricter soon, with more money to be kept in reserve as a ratio of their risk-weighted assets (loans, bonds and so on, that is), lenders had been getting even more wary of credit risks. A quick infusion of funds should relieve bankers of some worry on that front. For India’s banking sector on the whole to do a better job of allocating capital, however, it may need a hearty dose of free market competition. Less state control, that is, and a freer hand to bankers doing their utmost to outdo rivals at assessing what returns are worth what risks.

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