The government has launched the biggest ever loan mela in the history. It will force the banking community to dole out Rs 1,10,000 crore (Rs 1,100 billion) loans at concessional rates (two percentage points below their prime lending rates) to the farm, small-scale industries and infrastructure sectors.
Yet, the banking sector is not complaining. Why? First, they won't have to cough up the money as the government will subsidise the gap between the normal lending rate and the concessional lending rate. This works out to Rs 2,200 crore (Rs 22 billion).
Second, the banks will not have to pay tax on the interest income from such loans. This is to offset any impact of assets turning sticky in this segment.
Normally, the incidence of non-performing assets in farm sector and SSIs is high. With full tax exemption on interest income (30 per cent), banks need not worry about loan defaults.
Finally, the rural housing scheme will also have an insurance cover to take care of defaults.
The government will pay the premium for the cover and the banks will not have to bother about it.
The net results of this? The banking community heaved a sigh of relief. "In the run-up to the announcements, we were apprehensive. We are giving concessional loans to coffee growers and all agri loans up to Rs 50,000. But the government cannot expect us to bear the burden of such a massive programme. The banks are not wholly owned by the government," said a bank chairman under condition of anonymity.
"This is back to the loan mela, but hopefully we will not be affected. The government can win elections even without lending at concessional rates."
The finance ministry on Friday announced a Rs 50,000 crore (Rs 500 billion), three-year programme to build agri-infrastructure and provide more rural credit.
It also announced another Rs 50,000 crore package for the core sector projects at concessional rates. Finally, there was yet another Rs 10,000 crore (Rs 100 billion) fund for providing small and medium enterprises.
The loan rates in all the three cases are pegged at 200 basis points (2 percentage points) below banks' prime lending rate. If the government has not promised to bridge the gap, the banks would have lost Rs 2,200 crore (Rs 22 billion) in interest income. "This would have taken the bottoms out from some of the banks.
Only a big bank, such as State Bank of India, and a few others, including Punjab National Bank, Bank of Baroda, Canara Bank and Bank of India, can to some extent absorb the shock," said an industry analyst.
With the government promising to subsidise, the bank chiefs are seeing this as an opportunity to build assets. Had the government not promised to bridge the gap, banks in the private sector, such as ICICI Bank and HDFC Bank, would have benefited indirectly from the move.
Bankers, however, have no clue as yet how the schemes will be implemented. "We will not do anything unless we are directed by the Reserve Bank of India. The central bank may set up some committee to implement the government policy," said another banker.
The Union Budget 2003 forced banks to lend to small farmers at four percentage point below their PLR up to Rs 50,000. However, at that time the government did not promise the subsidise.
"Without government's backing, such schemes can be a disaster. So far, the banks have been able to post handsome profits riding high on treasury income. With interest rates bottoming out, treasury income will vanish into the blue from next financial year. Any scheme of concessional lending without government support will deal a blow to our balance sheets," said the chief executive of a mid-sized bank.