The credit lifeline

Context – Government has provided 20 lakh crore stimulus packages to revive the economy. In this article, analysis of initiatives taken by govt has been done.

Policy measures during the lockdown, must are to be assessed on two over-arching principles

1. The flow of funds slows with economic activity
2. Firms do not go bankrupt because of insolvency, but because of lack of access to funds

Assessment of measures taken by Govt.

• Earlier measures by the RBI, could not achieve desired result due to 
• Quantum of cheap funds made available were not substantial enough
• Heightened risk aversion tendency of banks: Reduced cost of funds had no impact on the volume and cost of the credit.
• 20% of the current outstanding credit, fully backstopped by the government: will drive immediate credit creation, and firms may use these loans to pay interest and cover losses.
• 75000 crore rupees liquidity to Non-Banking Financial Institutions (NBFC): will be enough to prevent NBFC defaulting due to lack of liquidity but it may not suffice to get them to grow.
• 50000 crore rupees fund to provide equity for MSME: it will help replenish depleting risk capital that occurred due to losses in lockdown. It will scale up the fund’s availability.
• Partial Credit Guarantee given to banks’ loans to NBFCs: it may be effective for some NBFCs but is based on willingness and ability public sector banks.
• Pre-announced the additional bond issuance for the year: it minimised the bond market volatility by giving an implicit assurance that additional deficits would be financed separately.
• Sharp increase in credit to farmers, through Kisan Credit Cards: help funds flow in the economy by increasing the quantum of new bank credit.

Limitation of Policy intervention

• It will affect only enterprises in formal sector and in agriculture. Informal non-agricultural enterprises are unaddressed. But it may incentivise firms to formalise.

Conclusion: The present interventions are a focused-on reforms and on sustaining India’s growth potential which is critical in preventing macroeconomic instability.