The government should consider giving tax rebates to companies undertaking capital expenditure (capex) in order to spur the economy, according to VG Kannan, Chief Executive, India Banks’ Association (IBA).

While such a concession will hit the fisc, Kannan emphasised that supporting the economy is the need of the hour.

In an interaction with BusinessLine , the IBA Chief Executive outlined his views on a host of issues, including relatively muted demand for credit vis-a-vis last year, the need to deter frivolous appeals in the resolution of stressed assets under the Insolvency and Bankruptcy Code (IBC), the ongoing amalgamation among public sector banks, and the need for depositors to be cautious when investing money in the backdrop of the scam at Punjab and Maharashtra Co-operative Bank. Excerpts from the interaction:

Why is credit offtake not gathering steam despite banks cutting lending rates on the back of the Reserve Bank of India cumulatively cutting the repo rate by 135 basis points since February?

When it comes to large corporates, no new expansion is taking place. They are borrowing for their normal increase in capacity utilisation ― suppose, they were operating at 70 per cent capacity utilisation, now they are operating at 80 or 85 per cent. So, their working capital requirements have gone up. But no major new capacity is being added. Hopefully, the government’s announcement regarding front-loading of capital expenditure (capex) will create demand for goods and services.

As there is no demand from the larger companies, the micro, small and medium enterprise (MSME) sector is getting affected.

In the retail sector, merely because something is cheap doesn’t mean you will buy. Tell me, how many people are going to buy a second house, a third house? With the uncertainty in the market regarding real estate, people prefer to go for completed houses or nearly-completed houses so that the uncertainty of non-completion is not there.

Today, there is fear that if I put money into a (housing) project and if it is not completed, I would still have to continue to pay the EMI. It means neither will I get rental income nor will I offset the existing rent which I am paying by moving into my own house. Therefore, it will be a double whammy for me. So, the confidence that projects will be completed on time has to come back. If that can be demonstrated, I think, demand will start returning.

Fortunately, one thing which will go in favour of the market is that the monsoon has been good. So, hopefully, the crops will come out very well. Then, you will have farmers earning and starting to spend. If that happens it could kick-start the economy.

Banks are flush with liquidity but demand for it is muted. What needs to be done to change the situation?

Now, easy availability of credit doesn’t mean that demand will be there. Demand needs to be created. The government has done its bit by reducing the corporate tax, etc. Whether that will go towards increasing the capex needs to be seen. They may have to revisit Section 80(I) of Income Tax Act relating to investment allowance, say, if you set up something in the next five years, you will get a tax rebate. Something like that needs to be done to spur the economy. This concession may hit the fisc but we need to spur the economy.

What is your assessment of the stressed assets resolution under the Insolvency and Bankruptcy Code?

IBC is a resolution process. The idea is to ensure that the asset is conserved and productive activities are carried on. That way some of the stressed assets which have been resolved, such as Electrosteel, Monnet Ispat, and Bhushan Steel, have been successful. There have been a couple of cases which have dragged on a bit too long and that causes a lot of discomfort. In fact, I would say if the IBC process is speeded up and qualitatively if the decisions come quickly, I think, half the problem on account of the non-banking finance company (NBFC) crisis also will be mitigated, because many of the banks will actually get recapitalised due to the inflow on account of resolution. And therefore, they would be in a stronger position to handle the NBFC crisis and bear the loss on account of these.

Have you suggested any changes to the IBC to prevent delays in resolution?

I feel there has to be some sort of deterrence for appeals against decisions by the adjudicating authority, because many of the appeals appear to be frivolous ab initio . But for some reason this delays the resolution process by 15 days or one month or two months. I think, whenever anyone is appealing, they should be asked to pay a small percentage as in the case of Debt Recovery Tribunal cases, say 0.25 per cent (of the loan outstanding) as a token amount. In the event the appellant wins, he gets back the amount, otherwise he will forego the amount. This will deter people from frequently appealing. So, unless they are fairly sure that they will win, they will not appeal.

Is the merger of six public sector banks (PSBs) with four PSBs the right thing to do?

Personally speaking, I am for mergers because all the banks (PSBs) are clones of each other, each trying to ape the other, very often without knowing the projects they have been financing (without really understanding whether they are strong in those areas). As all of them are government-owned, therefore, everyone has the view that they are all the same. The very fact that from 28 banks, the number of PSBs has come down to 18 is commendable. And nowhere in the world do you have four or five very large banks (in a country). I think, it is high time India also had five to six very large PSBs, two to three large private sector banks and the remaining banks can be regional banks or banks operating in niche areas.

After the scam at Punjab and Maharashtra Co-operative Bank what precautions should bank depositors take?

People have to understand that there is something called risk-return matrix. Anything which is high-risk always carries a high return. But you may not actually get your money back. So, anyone who is offering a return substantially higher than the market means there is something wrong. Therefore, the probability of default is much higher. So, people have to be cautious about investing their money.

That is the reason why despite some of the NBFCs offering very high interest rates, people are a bit cautious. They may invest a small amount but will not put their entire savings because there is a risk perception.

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