The Ministry of Finance has advised state-run banks to start a nationwide loan awareness program soon and take advantage of the potential rise in demand for credit in the run-up to and after Diwali, as the economy is on a path of “sustainable recovery”. FE sources said.
Banks were asked to set targets for loans to be penalized during a district-wide awareness program and to collaborate with fintech companies and non-bank financial firms to ramp up disbursement even for small borrowers.
The move follows Finance Minister Nirmala Sitharaman’s August instructions to state-run lenders to start an outreach programme, as the government has sought to spur economic growth through a continuous credit push, amid concerns that bankers are increasingly turning to risk aversion. The minister said that lenders disbursed loans amounting to Rs 4.94 thousand crore through a similar awareness program in different regions between October 2019 and March 2021.
After being silent for several months together, the flow of non-food loans has been on the rise lately. Growth in non-food bank credit improved to 6.7% in August from 5.5% a year earlier. Loans to industry grew 2.3% from 0.4% but remained low. This is despite the fact that the daily excess liquidity in the banking system averaged Rs 6 crore in July and August, according to CARE ratings.
The Ministry of Finance has also asked the Ministries of Agriculture, Labour, Housing, Health and Rural Development to help boost the number of insurance beneficiaries as well as awareness of pensions.
The Ministry of Finance believes that various sectors of the economy – including exports and emerging sectors – need credit support and that banks need to satisfy this appetite. The state-run banks have been asked to hold talks with various issuers and associations to support their loan requirements. This is also expected to provide support for the issue of exporting the product at the level of one region which was brought up by the Prime Minister.
The average weekly (net) liquidity surplus in the banking system, prevalent since June 2019, jumped from Rs 4.5 crore at the end of June 2021 to more than Rs 7.5 crore by October 5, according to CARE ratings. “The increase in the surplus can primarily be attributed to the persistent low credit spending by banks due to weak demand for credit as well as banks’ caution against lending,” it said in a report last week.
Likewise, the Secretary directed Public Sector Banks (PSBs) to confirm specific plans for each of the northeastern states to boost the flow of credit there. Some eastern states like Odisha, Bihar, Jharkhand and even West Bengal account for a large portion of CASA deposits for PSBs but credit expansion for business development there is still muted. The minister said this needs to be addressed.
The state-run banks have crossed the juncture, with profits of Rs 31,820 crore in fiscal year 21, the highest in five years. State-run banks’ net bad loans fell to 3.1% in FY21 from 7.97% three years earlier, and capital adequacy (CRAR) was about 14%, against a requirement of 10.875%. The Ministry of Finance believes that improved financial conditions have improved its ability to lend adequately.
Already, to boost the flow of credit to businesses and professionals affected by the Covid virus, the government last year introduced the Emergency Credit Line Guarantee Scheme (ECLGS). As of September 24, the loans approved under the various avatars of the scheme (ECLGS 1.0, 2.0 and 3.0) stood at Rs 2.86 crore.
Similarly, the Rs 7,500 crore Credit Guarantee Scheme, which was announced on June 28, has been used to facilitate soft loans for an estimated 25,000 micro-borrowers through MFIs entirely within 75 days.