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In all the revelry of the New Year celebrations, we all probably missed the all-important paper released by RBI on 31st Dec – The Financial Stability Report (FSR).  This report assesses risks to financial stability, looks at the resilience of the financial system and discusses issues relating to development and regulation of the financial sector.

Surprisingly, the FSR is pretty optimistic and the feeling which we get on reading the report is that the banking sector is slowly but surely getting out of the dark woods and the NPA resolution is well within sight. It also talks about there being an improvement in credit growth in Sept’18 but on closer look we see that it pertains mainly to retail and services segment; this in turn is driven by private banks, which as we all know, gives preference to retail lending.

In the FSR, the RBI has talked about the lending to the MSME segment, the report states that private banks lend to MSMEs on the backing of assets while PSU banks give regular loans for working capital and term loan structures. Thus PSU banks are not leveraging on their network, leading to better percolation of quality loans. The report stated that 20% of the exposure of the PSU banks is to the lowest rated MSMEs, where default risk is high.

But ironically, contradicting this very observation, RBI on Tuesday launched the “one-time restructuring” scheme. Under this, interest rates and even tenures of term loans can be revised without a change in asset classification from standard to non-performing. This scheme was widely used, rather misused, by the large corporates for evergreening bad loans; following which it was withdrawn in 2015. As of now, the restructuring remains closed for large corporates and only loans of MSMEs to the tune of Rs.25 crore can use this benefit. Even loans that were defaults as of Jan’19 but not yet declared as NPA will be eligible for this new scheme.

This is a good move as it will help the small borrowers tide over their current crisis, what with NBFCs too hit by liquidity issues. It will bring a temporary relief, giving them the much needed cushion to tide over the stress.  But for the banking sector, this is regressive from a credit culture point of view.

After Rajan took over, he completely shut down all doors of forbearances. We were finally at par with international banking norms but this flip-flop, albeit for a small amount means that we have started compromising on the bankruptcy regulation.

With elections being the only theme, looks like small businessmen and distressed farmers will be nurtured the most, as they were the most hurt when demonetization happened. They now need to be cajoled and coaxed and this is the best way.

What is worrisome once again is that before elections, the banks and RBI will go back to its ‘dancing with the farmers and small businesses’ but once the elections are over, the large corporates, the billionaires will have the dance floor all to themselves, all over again.  

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