THE GIST of Editorial for UPSC Exams : 01 September 2020 Demand and supply(Indian Express)

Demand and supply(Indian Express)

Mains Paper 3: Economy 
Prelims level: Non-performing assets 
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

Context:

• RBI Governor has warned banks against becoming “overly risk-averse”, which will be “self-defeating”.
• Bankers have reacted by saying the real problem isn’t risk aversion, but lack of demand for credit.

Lack of supply and demand:

• Aggregate deposits with banks have risen over Rs 14 lakh crore or 11 per cent year-on-year as on August 14, whereas the corresponding credit growth has been just Rs 5.35 lakh crore (5.5 per cent).
• Meanwhile, their investments in government securities have gone up by Rs 7.55 lakh crore (21.2 per cent).
• That, prima facie, indicates banks are in no mood to lend and prefer to park their money in relatively safe sovereign paper.
• But the fact that banks are now also deploying Rs 6.3-6.4 lakh crore daily with the RBI’s reverse repo window, which earns only 3.35 per cent annually, shows the extent of surplus liquidity in the system and few takers for their funds.
• In other words, there is a problem of both “supply” of credit by banks and no “demand” from borrowers, be it cash-strapped firms or insecure households.

Uncertainty:

• What can the RBI do? A major reason why banks aren’t making fresh loans is uncertainty over the fate of their existing loans.
• Following the COVID-19-induced lockdown, borrowers were offered a moratorium on payment of any interest or principal amounts due between March 1 and August 31.
• RBI data shows around half of the total outstanding bank loans being under moratorium as on April 30.
• The prospect of many of these turning into non-performing assets (NPA) once the six-month repayment holiday ends is a concern.
• The RBI has done well to allow a one-time restructuring of all loans that weren’t NPAs before March 1, while continuing to treat these as standard assets.
• But the important thing is to enable such restructuring to take place quickly without imposing too many conditions.
• Give banks the freedom to decide on the borrowers whose loans are deserving of being restructured — remember, they weren’t defaulters before the novel coronavirus struck — and ensure this is done transparently.
• Banks, ultimately, need to get back to the business of lending.

Economic activity:

• Creating conditions for banks to be in a position to “supply” credit will, of course, not solve the problem of “demand”.
• That can happen only with economic activity reviving, for which the onus lies more on the government than the RBI.
• The economic machine today has stalled because nobody’s really spending.
• The government must spend — rather invest — to grease the wheels of commerce.
• Once the economy starts moving, it will not only revive credit demand, but also improve the cash flows and debt servicing abilities of firms.
• And that would ease the NPA problems of banks as well.

Conclusion:

• RBI governor warns against risk-aversion, bankers point to lack of demand for credit. Onus lies more on government than RBI.

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Prelims Questions:

Q.1) With reference to World Urdu Conference, consider the following statements:

1. It was organised by National Council for Promotion of Urdu Language (NCPUL) in New Delhi.
2. The National Council for Promotion of Urdu Language (NCPUL) is an autonomous body under the Ministry of Minority affairs.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: A

Mains Questions:

Q.1) What are the major reasons highlighted behind the Indian economy contracted by a staggering 23.9 per cent in the first quarter of the current financial year?