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Business News/ Opinion / Columns/  Deepen domestic credit to enhance financial stability
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Deepen domestic credit to enhance financial stability

From the onset of the pandemic, our government, regulators and the financial sector came together purposefully to ensure credit continued to flow not just to traditional sectors, but also to newer and more accretive segments such as the MSMEs

While various factors have aided India’s resilience, it is undeniable that the financial sector has played a key rolePremium
While various factors have aided India’s resilience, it is undeniable that the financial sector has played a key role

India’s economy has emerged as a beacon with 6.8–7.0% growth expected in fiscal 2022-23, even as the world’s largest economies face a slowdown amid rising inflation and pandemic and war-related disruptions. While various factors have aided India’s resilience, it is undeniable that the financial sector has played a key role. The deepening and widening of domestic credit during this period sustained businesses while providing retail loans to support consumption-led growth. Thanks to this, India is in a position to temper the severity of a global recession.

This year’s Nobel laureates Ben Bernanke et al demonstrated how society might mitigate the impact of a financial crisis through a well-regulated financial system.

In India, that has already been observed. Indeed, it was a robust digital-age financial ecosystem that kept our credit engine running. The financial sector will do well to understand how this worked and ensure that domestic credit keeps flowing in the country even as global uncertainties persist.

From the onset of the pandemic, our government, regulators and the financial sector came together purposefully to ensure credit continued to flow not just to traditional sectors, but also to newer and more accretive segments such as the Micro, Small and Medium Enterprises (MSMEs). In addition, retail credit was more readily available to consumers as they emerged from the pandemic to buy and renovate homes, purchase vehicles and consumer durables.

Recent Reserve Bank of India (RBI) data reveals that bank credit growth accelerated to 17.2% in the quarter ended September 2022 from 7% in 2021. Another noteworthy expansion was seen in the MSME sector, where the loan market grew from 31 trillion in March 2020 to 36.4 trillion as of June 2022. Retail loans grew 16% in the last year. Interestingly, bank credit to non-banking financial companies (NBFCs) rose by 30.6 % year-on-year. The data not only points to the success of government policies in pushing growth capital into the system, but also to a coming-of-age of constituents like NBFCs and fintech firms that have extended the Indian financial sector’s reach through digital means.

Another interesting development of recent times is the financialization of retail savings to bring new capital to equity markets in the form of systematic investment plans (SIPs). In recent months, as foreign capital exited Indian markets chasing higher interest rates elsewhere, incremental retail investor money kept our equity indices propped, provided additional credit and boosted overall economic sentiment. As per data from the Association of Mutual Funds in India, assets under the management of SIPs climbed to 6.4 trillion in August 2022 from 5.76 trillion in March. Over the past five years, SIP assets have grown 30% annually, twice as fast as the overall MF industry’s growth.

All these developments have been in play for long but peaked during the past couple of years, holding India in good stead. Today, it is clear that India will be best served by a multi-engine credit delivery system where banks, specialized financial institutions and NBFCs, apart from insurance, asset-management and fintech firms, will all have roles to play. Policymakers and regulators must study their inter-dynamics in detail to ensure credit flows remain robust enough to support growth even in case of global headwinds. Enabling and deepening cooperation between key credit sectors such as banking and NBFCs is important, even as we nurture the ability of fintech firms to work in partnership with both. Better sharing of information among the three constituents would be a big step in this direction. In addition, banks and NBFCs will have to make a greater effort to adopt modern data analytics, including alternate data, artificial intelligence (AI) and machine learning (ML), to develop lending products and processes to serve newer segments such as low-income individuals and small businesses. With streamlined AI-driven pre-approval processes, loan rejection rates will reduce and approvals will get optimized.

In addition, India will have to take purposeful steps to encourage credit markets beyond traditional bank and NBFC loans. The time has come to renew our focus on deepening corporate bond markets and secondary markets for debt. While households and individuals have entered equity markets in large numbers via SIPs, we should run information and education campaigns to draw them into debt markets too.

As for the question of managing inflationary pressures without impacting credit flows in the economy, India struck a balance over the past year through determined but gradual interest-rate action, with RBI raising its main policy rate by 225 basis points. The gradual approach ensured that credit offtake did not suffer even as India’s inflation rate declined to around 5.9% in November. Similar care will be needed to tackle future inflationary pressures and currency challenges without sacrificing credit flows.

India’s economy has exhibited impressive resilience. It was supported in good measure by a robust financial sector, which has seen a radical transformation over the years as technology was leveraged and its reach extended, making finance more user-friendly and contributing to a technically healthier ecosystem. This process will need to continue. The various constituents of our financial sector will have to act like a team to move credit along and lead the country towards its goal of sustained economic growth, in spite of headwinds. I am confident we will be up to the task.

Rajiv Sabharwal is managing director and CEO, Tata Capital

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Published: 21 Dec 2022, 10:05 PM IST
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