Packages to burden banks

Even as Prime Minister Narendra Modi announced a Rs.20-trillion stimulus package on May 12 to succor various stakeholders who have suffered (and continue to suffer) economically due to the unprecedented COVID-19 induced lockdown, worries of common citizens refuse to fade away. If we take postmortem of the package by a breed of experts into account, the stimulus fails to address the immediate problems which the lockdown has brought in to every sector of economy. The design of the stimulus package does not address the urgent glitches of weak consumption and an unfolding humanitarian crisis. Notably, the package is loaded with credit support and guarantees, but these measures are far away from pulling the economy out of the COVID-19 induced crisis. To boost consumption, more measures are missing in the package.

It’s alarming to note the findings of the Chicago Booth’s Rustandy Center for Social Sector Innovation that about 84 per cent of Indian households saw their incomes fall last month due to strictest lockdown rules. The findings reveal that rural areas were hit the hardest. Interestingly, it also reveals that the outbreak of coronavirus had little to do with the economic misery. “Rather, income per capita before the lockdown, lockdown severity, and the effectiveness of the delivery of aid are likely contributors,” researchers wrote. More than 100 million people in the country have lost their jobs since March 25, when Prime Minister Narendra Modi stopped the production and sale of all but the most essential goods and services in a bid to contain the COVID-19 infection.

As the series of lockdown spells continues, the load of economic crisis is being shifted to the banking system through a series of packages (five in number). In other words, the stimulus package is relying overwhelmingly on bank loans to reboot the economy. Is this kind of credit infusion going to boost the economy? The answer is simply, no. Economy gets a boost when investment picks up. We can see investment picking up when people have money to spend.

At the moment almost every part of India is dotted with lakhs of migrant workers on roads struggling to reach their homes. We don’t find any tailor-made solution in the series of packages announced by the finance minister to address the miseries of these struggling migrants, who are unfortunately at the highest risk of contracting COVID-19 infection and also becoming a rich source of spreading the virus across communities. Yes, we find a strategy in these packages where they have been tossed to banks to fall in a debt trap. Queuing up at a bank branch in COVID-19 induced restrictions to obtain a loan is an uphill task, both for the people and the banks.

Let me explain with an example. As part of the Rs 20 lakh crore COVID-19 economic package, the government announced a scheme that offers Rs.5, 000 crore worth loans to street vendors. The scheme envisages a bank loan facility of Rs.10,000 as initial working capital to the street vendors, estimated to be 50 lakh in number across the country. The loan facility can be availed by them to restart their business once the lockdown is lifted. It will a sort of directed-lending as the banks would be given targets by the government to disburse these loans. Anticipating the situation once the lockdown is lifted, we cannot expect merry time for banks for creating such assets through such low-ticket size loans (Rs.10,000).  This kind of microlending is will banks under huge pressure and would hamper their core business operations to a large extent. Besides, the surge in non-performing assets (NPAs) is inevitable. The street vendors will mostly treat the facility as a COVID-19 relief package and repayments in such loans will be dizzy. On top of it, the banks will have to sideline their appraisal system while sanction/disbursing such loans. It is almost impossible for banks to conduct the due diligence of such borrowers and post disbursal follow-up of such units is a huge challenge for banks. It is a situation where banks would be required to spend Rs.50,000 to recover Rs.10,000!

The best strategy would have been to roll out the package through local business correspondents or microlenders. They have a thorough knowledge of their area of operation and can have better assessment of a street vendor in their area to ensure the money is coming back.

In a crisis situation like the prevailing pandemic, misuse of power and misappropriation of relief and other earmarked funds have been widely highlighted. There are such elements who are always ready to pounce on any kind of government relief measures to deny benefit to the deserving ones. As far as this street vendor scheme is concerned, bankers cannot expect a free-hand to extend this facility to genuine vendors. Indulgence of political middlemen in recommending candidates for street vendor loans is inevitable. Notably, bankers have a very bad experience in Mudra loan scheme, where such interefence has been rampant. In fact, this is true for any government schemes where politically backed middlemen pocket a part of the loan as commission. While writing this column, I am sure, many bankers will be busy in attending the calls of local politicians recommending their own favorites for this Street Vendor Scheme.

Now, the main question is about the end use of funds by the street vendor. He would be so exhausted by the miseries which he faced due to lockdown that he would first prefer to have a sigh of relief with cash in hand. He will likely go for spending this amount more on consumption items, rather than investing in business as working capital. This means, the bank loan becomes non-productive and there is no question of street vendor repaying the loan under these circumstances. So, in the given circumstances, banks have to watch these loans slipping into NPA category like a spectator. It would have been better for the government to announce a cash relief of Rs.5,000 to the street vendors out of the Rs.10,000 loan amount. A cash relief would have motivated the vendor to simultaneously invest the loan amount in restarting business. This would have also saved the banks from losing money to bad loans, which is imminent.

Meanwhile, the merry time of banks feeling relaxed for the low bad loan scenario in retail credit seems to be over once the lockdown restrictions are lifted. A report has been doing rounds in media that in the last six years retail loans have driven overall loan growth. Everyone is aware that industrial lending spoiled the loan book of banks as a huge amount of bad loans in this segment wiped the strong fundamentals of many banks in the country. This led the shift towards retail loans such as housing loans, vehicle loans, personal loans, consumer loans etc.

As of September 2019, the bad loans rate of retail loans was reported 1.8%, whereas in industry sector, the banks had reported a bad loans rate of 17.3%. The huge gap between the two bad loan scenarios made banks to go for aggressive retail lending. Personal loans and credit card have witnessed growth in outstanding. In 2019-20, both grew 20% and 22.5%, respectively, when overall bank loan growth was just 7.6%. Notably, these are unsecured loans, where there is no collateral security offered by the borrower against loan facility.

Now the pandemic induced lockdown is going to impact the health of the retail loans and ensuring consistency in repayments of these loans would be a challenge for the banks.

Most of the borrowers in this segment have faced salary cuts and there has been fall in their incomes, people have lost jobs and many are on the verge of losing it. Besides, businesses stand shut. In the given scenario, there is likelihood of borrowers defaulting on these loans and banks left with no option but to face the brunt. Don’t be surprised to see a stimulus package for banks in post COVID-19 situation.

(The views are of the author & not that of the institution he works for)