RBI's New Year Giveaway May Hurt Credit Culture, Fitch Unit Says

© Bloomberg. The {{0|Reserve Bank of India}} (RBI) logo is displayed inside the central bank building in Mumbai, India, on Wednesday, Dec. 5, 2018. India’s central bank kept interest rates unchanged for a second straight meeting as inflation and economic growth slowed in Asia’s third-largest economy. Photographer: Karen Dias/Bloomberg

(Bloomberg) — Indian central bank’s decision to allow a one-time restructuring of some loans to small businesses is bound to foster indiscipline among borrowers.

That’s the view of India Ratings and Research Pvt., a Fitch group company, on the relaxation extended to the so-called micro, small and medium enterprises. “This dispensation may encourage some of the MSME borrowers, which are otherwise operating satisfactorily, to opt for the scheme and impair the credit discipline,” according to Karan Gupta, associate director at India Ratings.

The relief to small businesses was Shaktikanta Das’s first big policy move as Reserve Bank of India governor, and surprisingly came a day after the RBI’s financial stability report warned that the sector was contributing to an outsized growth in soured loans among state-run banks.

The move has been roundly criticized by most analysts, and many fear the culture of forbearance is back and could lead to more problems in India’s struggling banking sector.

The inherent weakness in operations of small- and medium-scale companies may still play out and manifest after the period of reprieve is over, Gupta wrote. Such relief offered in the past have not led to any material improvement in asset quality for the sector as these companies’ cash flows remain under pressure, he said.

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