India’s consumer credit crunch could derail economic recovery

A major risk to India’s economic recovery is that millions of households and small businesses could be deprived of the credit they need, according to JPMorgan’s chief emerging markets economist.

The government, central bank and analysts underestimate the level of permanent scarring that can occur in South Asia’s largest economy as a result of the contraction caused by last year’s pandemic, Jahangir said on Friday. Aziz on CNBC “Squawk Box Asia.

Loss of income

The loss of revenue from the coronavirus pandemic runs into billions of dollars every year, according to Aziz. “We know that listed companies have not suffered so much, so SMEs (small and medium-sized enterprises) and households have to take a much bigger hit,” he said.

This includes workers in the informal sector, such as day laborers as well as service and domestic workers.

“I just can’t imagine that with this kind of loss of income, you won’t have a serious deterioration in household and SME balance sheets,” Aziz added.

He explained that many of them had not yet appeared on lenders’ loan books due to the Reserve Bank of India (RBI) debt moratorium last year. To mitigate the economic impact of the foreclosure, the central bank said last year that lenders were allowed to grant borrowers a temporary deadline for monthly loan repayments between March and May. It was later extended until August.

“But the debt moratorium doesn’t solve the problem, it just pushes the problem back into the second half of the year,” Aziz said.

People line up at a bus shelter in Mumbai, India.

Ashish Vaishnav | SOPA Pictures | LightRocket | Getty Images

India’s credit problems

India’s micro, small and medium-sized enterprises contribute around 30% of nominal GDP and the sector is the country’s second largest employer behind agriculture, according to the central bank.

To support these businesses, the RBI introduced emergency credit programs and implemented policy measures such as interest rate cuts, a debt service moratorium and a loan restructuring package.

According to local media reports, lenders said most of the one-time restructuring option was used for business loans and very little for personal loans, implying either people repaying on time or a bad debt crisis could potentially hide.

Another concern is that with weakened balance sheets, small and medium-sized businesses might not get the loans they need in the future. This is because, potentially, lenders can choose to lend only to large companies who have withstood the crisis relatively better. Or, they can charge small businesses a higher premium for loans. The financial sector was already grappling with bad debt before the pandemic hit.

“So one of the main risks I have is that exactly when we would like credit to pick up, there will be a whole bunch of people and SMEs that won’t be able to get credit,” Aziz said. .

In his biannual Financial Stability Report Released in January, the RBI said it expects bad loans to reach 13.5% by September, almost double the 7.5% seen a year ago. If the situation worsens, non-performing loans can reach 14.8%, the central bank said.

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