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RBI is doing its bit, over to the government now

The Financial Express
RBI rate cut, Rajnish Kumar, NEFT platform,  FY20 growth, ICRA, inflation, NBFC sector, RBI, Monetary Policy Committee, Ficci President, India Inc, PHD Chamber of Commerce and Industry, GDP, MSME sector

Within hours of RBI governor Shaktikanta Das’ unconventional 35 basis points repo rate cut, SBI had dropped the interest rate for fresh loans by 15 bps. That is speedy transmission for sure. However, the fact is there’s a fair bit of catching up left for all lenders since the cumulative repo cuts of 75 basis points till June resulted in a fall of just 29 bps in loan rates.

Governor Das’ efforts to revive credit growth are to be lauded but, unfortunately, merely lowering interest rates may not be enough to stimulate appetite for credit. At this point, when there is a fair bit of surplus capacity and visibility on demand—both locally and overseas—is somewhat poor, the private sector has no real incentive to invest. That would require big reforms in labour, land, regulation and agriculture. As SBI chairman Rajnish Kumar had said a few days ago, it is the demand that is missing.

But the central bank can do only so much. Indeed, it is doing more than its best to create a conducive lending environment for banks; liquidity has been more than ample for two months now—a surplus of around `2 lakh crore—and on Wednesday, there was assurance of more if needed. Easing the norms for bank lending to NBFCs is helpful; loans to a single NBFC can now be 20% of Tier One capital compared with 15% earlier. Moreover, banks can route some of their priority sector lending—agriculture investment loans, affordable home loans—through NBFCs. Unfortunately, the addressable opportunity may not be large since the top-quality NBFCs don’t really have too more trouble raising money in the bond markets and banks will choose to stay away from the weaker players post the IL&FS and DHFL crises.

As Das rightly observed during his interaction with reporters, the central bank cannot compel banks to lend to any particular sector or customers; those decisions are dependent on ratings and are entirely at their discretion. Relaxing the lending norms for consumer credit by lowering the risk weights (except for credit cards) should help banks push through more loans to this space, though most of them already have big retail exposures.

Many have observed that the RBI’s revised GDP forecast of 6.9% for 2019-20, with a downward bias, is optimistic. That may be so, but Das has done well to articulate RBI’s concern on growth without any alarmist commentary. Das said the slowdown was cyclical, whereas most economists believe a good part of it is structural. Nonetheless, he seems to be working towards his priority to boost aggregate demand. Das has done the right thing in not pressuring banks to link their loan rates to external benchmarks at a time when they are struggling with NPAs and slow deposit growth.

Also, he has reassured the markets, saying the RBI would make sure no systemically important NBFC collapses. Given how inflation is expected to remain benign for at least another year—RBI now forecasts Q1 2020-21 inflation at 3.6%—there is room for another rate cut. That could come in early October, but at the risk of sounding repetitive, rate cuts are little use without meaningful transmission.