Former RBI governor R Gandhi said that the RBI needs to re-introduce a one-time restructuring package and mere moratoriums will not suffice in unprecedented times like the COVID-19 pandemic.
Former RBI governor R Gandhi on Monday expressed doubt over the efficacy of the government's stimulus package, terming the aim of Rs 7.9 lakh crore uptick in lending to small businesses, agriculture and power discoms as not "feasible".
He also said that the RBI needs to re-introduce a one-time restructuring package and mere moratoriums will not suffice in unprecedented times like the COVID-19 pandemic.
As part of the over Rs 20 lakh crore package announced by Prime Minister Narendra Modi, Rs 3 lakh crore was devoted to collateral-free loans to micro, small and medium enterprises, Rs 2 lakh crore were to be given to farmers through kisan credit cards and a liquidity injection of Rs 90,000 crore was assured to the fund starved power distribution companies.
Gandhi, who used to handle the banking regulation function at the central bank, said all the banks put together gave out incremental loans of Rs 6 lakh crore in the entire fiscal year 2019-20, when the growth had not plummeted as it is expected to now.
Additionally, there are other segments of the economy as well which are in need of credit, Gandhi said, adding that the same number will be over and above the Rs 7.9 lakh crore.
"Feasibility of the package ...(it) is unlikely to be really possible because actually the calculations which have been made by the government are based on the total eligibility based on the government's assessment," Gandhi said, speaking at an online webinar hosted by payment system company Electronic Payments and Services.
He said it is "unlikely" that all the borrowers from the MSME sector will be availing the entire credit which they are assumed to be taking because of the economic sluggishness and added that many such businesses have folded up as well.
"Credit only gives you a little bit of liquidity, whereas the businesses have to look forward that there will be a demand for services, hope for profitability, then only they will come to avail credit," he said.
He also said that bankers will be hesitant about extending loans to such companies because of concerns on the borrowers' profitability and also to reduce their own dud assets positions in an environment like this.
Over two years after the RBI completely did away with the loan restructuring system, Gandhi sought a reintroduction of the same in the current times.
"It (a loan) should not be stamped as an NPA. The forbearance should be given in the current days, mere moratorium is insufficient," he said, adding that the troubles on the economic front, including aspect like an entire quarter lost to lockdowns will make it necessary for the relief to be extended.
He, however, said that the RBI must also increase the general provisioning on assets given the volatile times we are in.
He also pitched for the government to rely more on cash transfers, rather than spending on infrastructure building, to revive the economy, explaining that the latter is good in normal times while the former helps create consumption demand which is very much needed.
Gandhi also said that despite the COVID-19 situation, the government or state-run entities have not released payments for small businesses, and sought the introduction of an automated system to make the payments possible so that the small businesses do not suffer.
He also said that the government and the RBI have laid out the enabling regulation and bankers should start taking their credit calls based on their assessments, and not depend on “spoon-feeding” on what to do.
Given the change in environment and a larger portion of credit being taken by the services sector, there is a need to reimagine credit delivery where a banker does not depend on collaterals alone while assessing a proposal, he said, stressing on the need for looking at cash flows as well.
The career central banker said loan monitoring has become “topsy-turvy” during the last quarter because of the lockdowns and the same should be internalized by the top management.