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Last updated: 27 Jul, 2020  

Rupee.9.Thmb.jpg Risk aversion not the way to growth

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Bikky Khosla | 27 Jul, 2020

The RBI is expected to go for another dose of repo rate cut in its MPC meet during August 4 to 6, according to a latest survey conducted among a group of economists and industry experts. At a time when India’s growth story has taken a hit due to the COVID-19 crisis, such a move would be welcome. Recent retail inflation data shows an uptick, but still it is widely expected that a calculative accommodative move will be taken by the central bank in August first week.

Meanwhile, risk aversion by commercial banks is clearly evident in latest credit data. According to the RBI Financial Stability Report, heightened risk aversion pulled the overall credit growth rate of scheduled commercial banks to 5.9 percent on a year-on-year in March 2020, from 13.2 percent in March 2019. The report adds that among the PSBs, there was a sharp credit contraction across all rating categories except and above as also among non-PSU obligors. This is a concern, no doubt.

More recently, the central bank Governor pointed out that such extreme risk aversion by financial institutions will have adverse outcomes for all as the Indian economy is reeling under the COVID-19 pandemic and post-lockdown woes. The economy now needs a strong capital push and in this regard our financial intermediaries must play a proactive role. It is also notable that, these days, banks are largely shying away from lending, particularly to the MSME sector, and this trend must end if growth is to revive.

Meanwhile, the government has revealed that it will soon set up a single window system for clearances and approvals of industry. It is a welcome move. Also, work is already going on for setting up a land bank, for which six states have already given their consent. Last week, a top official also informed that the Centre will soon come out with new stimulus packages to boost manufacturing. These decisions are welcome, but at the same time, credit flow must be given a strong boost if we want to pave way to sustained economic growth. 

I invite your opinions.

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