There’s a need to boost lending to infuse real liquidity in consumers’ hands3 min read . Updated: 20 Aug 2020, 10:44 PM IST
Unless money reaches new consumers, demand stimulus will not happen
The covid-19 pandemic has mauled the Indian economy. The ₹20 trillion stimulus package announced by Prime Minister Narendra Modi to support businesses was welcomed across the board. The ₹3 trillion Emergency Credit Line Guarantee Scheme (ECLGS) at a discounted rate of 9.25% for the MSME sector was most constructive and efficacious.
The government also announced a ₹30,000 crore special liquidity scheme for non-banking financial companies (NBFCs) to help establish their funding operations. Though the scheme has been formulated to stimulate consumer demand and encourage lending institutions, the stated objective may not have been achieved. The Reserve Bank of India (RBI) has recognized that there is a slump in private consumption and banks are the key players in financing consumption and investment. Banks and NBFCs are enthusiastic about lending to existing customers. There is, however, an understandable reluctance in extending credit to new clients. As things stand today, it would be safe to assume that the abundant liquidity hasn’t resulted in the desired uptick in demand.
Unless an enabling environment is created for lenders to extend credit, the enhanced liquidity will remain parked with RBI. Consequently, money will not reach new customers and will not lead to the much-hoped-for demand stimulus.
One way the government can fix this is by rolling out a 20% first loss guarantee (FLG) scheme for lenders. An FLG cover of ₹1 trillion will enable banks to lend more aggressively, especially to new customers. The instrument designed to protect lenders from possible losses in the event of non-payment of loans by borrowers is in fact a tried and tested credit enhancement practice that the government must consider. The scheme must cover banks, NBFCs, housing finance companies and micro-finance companies that extend personal finance, including credit cards, personal loans, home loans, loans against property (LAP) and business loans. Lenders should be requested to pay special attention to the self-employed.
Banks and NBFCs are shying away from aggressive lending because there is a justified fear that NPAs (non-performing assets) might shoot up. Historically, no more than 5% of individual consumer credit ends up in the NPA trash can. So, even in these troubled times, lenders can confidently extend credit if backed by 20% FLG.
Such guarantees have been offered in the past as well. When the NBFC sector was facing a liquidity crunch in 2018, finance minister Nirmala Sitharaman promptly announced a one-time six-month partial credit guarantee to public sector banks for first loss of up to 10% for the purchase of pooled assets of NBFCs. The ₹1 trillion scheme was meant to address the liquidity issues faced by NBFCs and housing finance companies so that banks could fearlessly purchase NBFC portfolios.
Theoretically, a 20% FLG of ₹1 trillion can leverage a credit offtake of ₹5 trillion for consumers, which in turn would swiftly stimulate demand for travel, real estate, consumer durables and home improvement, among others. Not only should this be accorded the same urgency as priority sector lending, there should also be a timeline mandate— ₹5 trillion should be compulsorily disbursed soon, say by March 2021.
This infusion of real liquidity in the hands of individual consumers could be the catalyst that the economy is so desperately waiting for. The FLG need not be open-ended. A fixed validity of three years is adequate. Personal credit is, typically, short-term, and home loans beyond three years rarely go bad. Additionally, the debit for this relief will not hit the exchequer immediately and will instead be amortized over the coming two-three years.
Now that the lockdown has been lifted, companies are upbeat about revival. S&P Global Ratings expects the country’s economy and fiscal position to stabilize and begin to recover from 2021. It expects India’s GDP to grow 8.5% in 2021-22. India’s demand is for real. A catalyst for consumer lending will pay off handsomely.
While the steps taken to revive the economy and bring it back on track deserve praise, the government must also help financial institutions regain their lost confidence and start functioning to their full potential. As Neil Armstrong might say: a First Loss Guarantee scheme is “one small step for banking, one giant leap for India".
Raj Khosla is managing director, MyMoneyMantra.com