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RBI’s New Year giveaway policy could damage the credit discipline

RBI’s New Year giveaway policy could damage the credit discipline: The Reserve Bank of India has decided to grant a one-time reform of some loans to small businesses.  According to the India Ratings and Research Private Limited, this decision could bring indiscipline among borrowers. India Ratings and Research Private Limited is a Flitch group company. It said that the exemption to the micro, small and medium businesses could cause damage to the credit discipline.

“This dispensation may encourage some of the MSME borrowers, which are otherwise operating satisfactorily, to opt for the scheme and impair the credit discipline,” said Karan Gupta, associate director at India Ratings.

As RBI governor, it was Shaktikanta Das’s first big strategy move to give the exemption to small enterprises. Then, came a day the central bank’s financial stability report notified that the part was subsidizing to a massive growth in soured loans among state-run banks.

Rising Bad Loans

State-run banks’ exposure to MSMEs are turning sour

Source: RBI’s Financial Stability Report, TransUnion CIBIL

India’s state-run banks have the largest share of loans turned bad in the MSME sector, according to the RBI’s Financial Stability Report. Latest figure is for June 2018.

This move by Shaktikanta Das’s is being completely criticized by many political analysts while many fear that this move could bring the tolerance back and could also bring struggle back in banking sector.

Karan Gupta, associate director at India Ratings wrote that this intrinsic flaw in the processes of small and medium enterprises could still work and may clear after the period of exemption is over. The exemption and aid offered has not given any material progress in asset quality over the past for the cash flow of these enterprises.