Reviving the Lending Appetite  of Banks

The flow of bank credit is crucial to revive the economy. The fear of potential asset quality woes has reduced the risk appetite of banks. Going beyond the restructuring support, banks need policy support by relaxations in prudential norms in the near term to be normalised in the next four–fi ve years. Coping with the adversities of the pandemic needs a collaborative policy support of all stakeholders to step up the lending appetite.

In response to the economic distress, banks are unable to aggressively lend. In an unprecedented economic crisis, addressing collateral damage of the pandemic on banking sector, like many other sectors, is a complex and prolonged collaborative process. In the COVID-19- induced disarray, banks found the potential surge in non-performing assets (NPAs) and its impact on their fragile capital base scary. During disruptions of this magnitude when deterioration in asset quality poses a systemic threat, sustained policy interventions are needed to build an ecosystem suitable for banks to lend. The flow of bank credit is indispensable to bail out distressed borrowers and to revive the economy.

The inevitable fear of spike in NPAs after the end of the moratorium on loan repayments, additional provisions against rising NPAs, diminishing profitability, and other adversities added to the already low risk-appetite of banks, thus leading to a subdued credit growth. As a result, even the trailing low credit growth at 6.1% on 27 March 2020 further fell to 5.5% by 28 August 2020, inviting the attention of regulators. Correspondingly, the outstanding bank credit went down by a notch from `103.2 trillion on 27 March 2020 to `102.11 trillion by 28 August 2020.¹