The president of the World Bank has mentioned lately that the international economy has currently entered a recession that is probably to continue for numerous years. Another report mentioned that banks in the United States had currently suffered a 30 per cent decline in their income as at June 2020. Today, the scenario could be worse. A report by the international consultancy group Deloitte says that banks in Hong Kong are possessing to make big provisions to bear the anticipated losses due to the Covid pandemic and their income are below stress. Our banks have bucked this international decline and our significant public sector and private banks are displaying larger income. At the similar time, our share marketplace is buoyant and has touched historical peaks.
This golden scenario of the Indian banks comes with specific caveats. A report by IIFL Finance says that building, compact industries and civil aviation sectors are below stress. A shopkeeper from Uttarakhand mentioned that the organization of schools and coaching centres had practically come to a standstill. Another mentioned that borrowers had been cutting down on individual expenditures and repaying bank loans for worry of penal actions.
Yet one more mentioned borrowers had been unable to encash the post-dated cheques offered to lenders at the time of taking the loans. A chartered accountant from Faridabad mentioned that the companies of his consumers had declined by about 30 per cent. Small companies that had been paying Rs 1,000 to file GST returns earlier, had been now paying only Rs 600 to Rs 700 for the similar filing, he mentioned. A quantity of international agencies have reckoned the decline in India’s GDP this year to be about 10 per cent.
Contrary indicators
Thus, we are confronted with two contrary indicators. On the 1 hand, international and ground reports say our economy and banking sector are below tension. On the other hand, our significant banks are reaping income and the Sensex is scaling historic highs.
The composition of lending by our banks can aid us unravel this mystery. Our banks have lent 33 per cent of their total loans to big corporates 33 per cent to retail borrowers 13 per cent to international borrowers 12 per cent to compact industries and 9 per cent to agriculture. Large corporations, international borrowers and agriculture have been buoyant throughout the pandemic, therefore these are very good lendings. We have to have to appear closely at the lending to retail and the compact business sectors.
One significant element of retail lending is automobile loans. According to knowledgeable sources, 80 per cent of these have been offered to public sector workers. The second significant element is individual loans. Ninety-4 per cent of these are once more, offered to public sector workers. The third significant element is household loans. Fifty per cent of these are offered to public sector workers and 20 per cent to workers of big corporations. The exposure of the banks to the “common man” or the non-public sector workers is fairly low. Public sector workers have continued to delight in steady incomes throughout the pandemic thus, the retail lending portfolio of the banks does not show any distress.
Moratoriums on payments
Contrary to ground reports, lending to compact industries as well does not seem to be below tension. We ought to have anticipated compact companies in building, tourism and coaching to default on their borrowings. There are 3 achievable motives for the normalcy in these sectors. One, the government had placed a moratorium on loan repayments from March to August this year. Borrowers have created some cushion in this period and are repaying the loans from this backstop. Two, the Reserve Bank of India has asked banks to be liberal in rescheduling the repayment of the loans and therefore, repayment has been pushed into the future. Three, the Government has assured extra loans offered by banks to compact companies. Thus, compact companies could be borrowing below this scheme to hold themselves afloat. The repayment crisis of compact borrowers has been pushed back and not appeared in the open mainly because of these actions.
This discussion suggests that the Indian economy has been divided into two sections. One section is of the sectors that are carrying out nicely. These involve big corporations, international borrowers, and agriculture and retail, which is driven by public sector workers. Further, the difficulty that could be brewing in the compact business sector is also not visible at present mainly because of the several actions taken by the Government and the RBI.
Temporary lull
This scenario could stay steady for some time till the discomfort of the retail borrowing by the non-public sector workers, and compact industries starts to seem. Today, public sector workers are about two crores in quantity. They could account for about eight crore folks if their household members are counted. The remaining 127 crore of the 135 crore population do not have comfy incomes and could not be capable to repay the loans taken for a when. The relief granted to compact industries by moratoriums, rescheduling and Government guarantees as well is short-term. Their incomes are down but this distress has been pushed into the future. The Indian economy is like oil on water, producing colourful patterns but the stench is hidden beneath.
Two achievable scenarios can unfold from right here on. As of now, the Indian economy is displaying a increasing Sensex and declining GDP. The total economy is shrinking, when the share of major corporations is increasing. The 127 crore folks are unlikely to come out unscathed from the this decline in the GDP brought on by the pandemic, offered the distress in employment-intensive sectors like tourism, coaching, compact industries and building.
Nevertheless, this scenario could hide a beneficent future if the Government is capable to give direct money transfers to all the folks to meet their standard demands. In that case, we will establish a golden economy, exactly where there will not be a have to have for each particular person to “work”—as Karl Marx had dreamt. On the other hand, this similar could hold hazardous portents if the prevalent man is left to fend for himself when the Sensex roars and banks make cash. The prevalent man will get agitated and the anger will erupt in 1 type or the other.
The buoyant efficiency of the Indian banking sector—contrary to each the ground reports and the international movement—is like a particular person moving cleverly to the higher finish of a sinking ship, considering they will save themselves. The challenge ahead of the Government is either to persuade the 127 crore folks to accept their distress without the need of demur or to make direct money transfers to allow them meet their standard demands.
The writer is a former professor of Economics, IIM Bengaluru.