Banking system needs to ensure liquidity in market, says Arun Jaitley

Jaitley's comments come at a time when both the RBI and the government are witnessing a tense relationship that has spilled out in the public

Finance Minister (FM) Arun Jaitley on Sunday called for an enabling environment to improve the credit ability of banks and provide liquidity to the market, at a time when the government has suggested a slew of measures from the Reserve Bank of India (RBI) to improve the cash flow in the economy.

“A strong banking system will be able to improve credit in those sectors which need credit. MSMEs (micro, small and medium enterprises) need credit. NBFCs (non-banking finance companies) need credit, as a large part of the lending is done by them and their ability to lend cannot be reduced,” Jaitley said, adding, “The strength of the banking system has to improve. Banks must be in a position to give credit, so that the liquidity of the market is maintained.”

Jaitley was speaking at state-run Union Bank of India’s 100th-anniversary celebrations in Mumbai over video conferencing. The FM said the government’s immediate target was to strengthen the banking system, highlighting the fact that it had committed to pumping in close to Rs 3 trillion towards the recapitalisation of banks in the last four years.

Following the FM’s address, during the same event, Minister of State for Finance Shiv Pratap Shukla said that “one or two institutions are weakening the banks”, without referring to any institution directly. “But banks need to show courage and move ahead,” he said.

The minister’s comments come at a time when both the RBI and the government are witnessing a tense relationship that has spilled out in the public. The RBI showed signs of discomfort following the government's move earlier last month to invoke a rare provision under the RBI Act to initiate dialogue on a dozen of issues where they do not seem to see eye to eye.

Among various suggestions, the government has particularly requested the RBI for a special refinance window for NBFCs, a facility for banks to raise $30 billion, a review of the capital adequacy norms of banks and the need for high-risk weights for credit to MSMEs, enhancement of opportunities for rectification, and restructuring of MSMEs’ loan accounts.

Stressing how the government’s recapitalisation exercise helped public sector banks (PSBs) to get out of a “challenging” phase and improve lending capacity, Jaitley said “the whole system” needed to ensure liquidity was available in the market and the lending ability of banks is strengthened.

"The future of our economy and its growth depends upon this lending capacity. Therefore, we have to target in ourselves and in our policies… the whole system has to target itself in a direction where we improve the credit-giving ability of banks and we improve the liquidity available as far as markets are concerned," the FM said. He added this will boost economic growth, helping the government in earning more revenues and reaching out to the poor.

He said PSBs have an onerous responsibility in a competitive environment as it cannot rely on retail banking like their private sector counterparts. "That would have been an easier course to adopt," Jaitley said, adding banks lend to all sectors of the economy, besides growing its network across the length and breadth of the country. Jaitley also said there is a need to bring down non-performing assets (NPAs) in the banking system in order to support growth.

About a dozen suggestions made by the government to the banking regulator will be discussed in the forthcoming board meeting of the central board of the RBI on November 19.

Some other suggestions were related to the application of Basel III norms to banks that are not internationally active, building up a capital conservation buffer during periods of stress, the need for keeping the RBI capital adequacy norms at 1 per cent higher than Basel III norms, the efficacy of the framework for prompt corrective action for banks in restoring banks to health.

The government had initiated a dialogue on these issues through a series of letters sent to the RBI in October, invoking consultation process under Section 7 of the RBI Act. According to it, the central government may issue directions to the RBI as it may "consider necessary in public interest" after consultation with the RBI Governor. Section 7 deals with 'management' of RBI and has never been invoked by the government to invoke directions to the regulator so far.

Jaitley also said the goods and services tax (GST) implementation was a "monumental reform" which had caused disruption on economic growth only for two quarters, hitting out at "critics and cynics" who blame it for hurting the economy.

The remarks come a day after former RBI Governor Raghuram Rajan blamed the indirect taxation reform, which came into force on July 1, 2017, for derailing India’s growth story. Jaitley did not name Rajan.

"You will always have critics and cynics who will come up and say it (GST) slowed down India’s growth," Jaitley said, speaking at state-run Union Bank of India’s 100th-anniversary celebrations event here over a video link.

The FM said after suffering for two quarters, growth increased to 7 per cent, then to 7.7 per cent and went up till 8.2 per cent last quarter and specifically pointed out that this is much higher than the 5-6 per cent expansion achieved between 2012 and 2014.