June 10, 2023

The Banking System: Money, Money Everywhere, But Not A Penny To Lend

By Ashwini Agarwal
First publised on 2020-09-03 13:53:17

About the Author

View all posts by this Author

Two things are absolutely clear: the banking system is flush with funds and either there is no demand for credit or the banks are unwilling to lend. The figures say it all. Bank deposits have increased by 11 percent YoY till the middle of August to over Rs 14 lakh crore while credit has gone up by only 5.5 percent to Rs 5.35 lakh crore. This is one side of the story. On the other side, it is seen that banks have invested Rs 7.55 lakh crore (a jump of 21.2 percent) in government securities and are parking over Rs 6 lakh crore daily in the RBIs reverse repo window which yields a paltry 3.5 percent annual interest. This clearly shows that there is no dearth of money and banks are investing them in low, yield but safe avenues. This could be due to two reasons: either there are no borrowers or the banks find it risky to lend to the ones who are approaching them.

One thinks that it is a combination of both. The pipeline of big projects, shrinking even before the lockdown due to the downtrend in the economy, has almost dried up. In the absence of demand, entrepreneurs are not interested to invest in expanding capacity or set up new units. With the government not investing in infrastructure, the demand for downstream units is also not materializing. Local MSME businesses, although buoyed by the government's Covid package, find that bankers are unwilling to lend to them just on the strength of the lockdown-induced distress. Of the few projects that do come, banks are either not convinced of the viability of the projects or the credentials of the promoters. Hence they are parking their money in government securities or with the RBI. Although the RBI governor has chided them for their risk-aversion, it is not right to put all the blame at the doors of bankers. The system suffers from many well-known anomalies and the government and the RBI must address them without further delay. The bankers would take risks if they are not criminally prosecuted for taking decisions in the normal course of duty. Other systemic and structural glitches must also be removed.