The government led by Prime Minister Narendra Modi has shown remarkable swiftness in its in approach by providing moratorium on loan payments for common man as well as corporates and other small businesses.
The Modi government also provided stimulus to businesses in the country by announcing a relief package a few weeks ago, while, the earlier decision to slash corporate tax rates was a shot in the arm for Indian corporate sector.
Prime Minister’s new clarion call for Aatmanirbar Bharat, which he spoke from the ramparts of the Red Fort on August 15 envisages greatly reducing India’s dependence on foreign (RBI) to provide a moratorium on loan payments is already being hailed by the industry and common man.
Modi has said on many occasions that wealth creators must be respected, they not only contribute to the economy but provide employment to large parts of the nation and contribute greatly to nation building. But for the government to realize its plan to achieve a $ 5 trillion dollar economy, there are some areas which urgently needs the intervention of the government and the RBI.
While the Finance Minister Nirmala Sitharaman has encouraged banks to lend to businesses, at the level of banks, businesses face some hurdles which needs to be addressed. Primarily, the practice of levying differential interest rates to corporates, greatly affects their competitiveness. These interest rates are levied on loans based on the credit ratings of the company. Though, on paper, this seems fair, in practice the difference in lending rates to highly rated corporate and a moderately rated corporate can be as high as 6 per cent. Banks lend thousands of crores in loans to businesses and the difference in rates of upto 6 per cent leads to enormous difference in the amounts to be paid. This interest differential interest regime greatly affects the competitiveness of companies who have to produce the best product at the lowest cost to compete globally.
Lending rates in India are already higher than many nations around the world, and the differential interest rates regime makes the situation worse for companies. At a time, when the government is encouraging the businesses in India to be competitive globally, if the interest differential on loans is bridges by bringing down the interest rates levied on loans, the companies will get the handholding and encouragement that is needed that this time. It is rather ironical that a corporates which is rated moderately, because of its perceived financial health is asked to pay more interest rather than handholding it. A high rate of interest would only push the company towards collapse by rendering it uncompetitive. Also, credit rating is important, but is not a solution to all problems, for example, Infrastructure Leasing & Financial Services (IL&FS) and Enron collapsed despite all the rosy tales around those companies. The RBI surely don’t want companies to default. Also, the banks do take collaterals while disbursing loans and hence can easily help these companies nurse to the pink of health by simply reducing the interest differential. For example, in retail lending, the interest differential is about 2 per cent maximum. The banks decide how much interest to levy based on the CIBIL score of the applicant. Hence, why shouldn’t the RBI also make a similar policy for business and corporates by reducing the interest differential to 2 per cent?.
At a time, when industry is going through tough times due to slowdown in the economy, RBI should address this issue which will prevent a large number of corporates recover faster. The government is already on the right track with the various decisions taken as part of its Aatmanirbhar initiative, if the government also takes up this issue, the corporates would be nursed back to health faster and the job generation cycle may then see an uptick.
Tarun Nangia is the host and producer of Policy & Politics.
