Calcutta Notebook

Stability And Instability


The President of the World Bank has said recently that the world economy has already entered into a recession that is likely to continue for many years. Another report said that the United States' banks had already suffered a 30 percent decline in their profits as at June 2020. Today the situation would be worse. A report by global consultancy group Deloitte says that banks of Hong Kong have to make large provisions to bear the expected losses due to the Covid -19 Pandemic and their profits are under pressure. Indian banks have bucked this global decline and major Public Sector and Private Banks are showing higher profits. At the same time Indian share market is buoyant and has touched historical peaks.

This golden situation of Indian Banks comes along with certain caveats. A report by IIFL Finance says that construction, small industries and civil aviation sectors are under pressure. A shopkeeper from Uttarakhand said that business of schools and coaching centres had almost come to a standstill. Another said that borrowers are reducing their personal expenditures and repaying the loans to the banks because they are afraid of penal actions. Yet another said that the borrowers were not able to have encashed the post-dated cheques given to lenders at the time of taking the loans. A small Chartered Accountant from Faridabad said that business of his clients had declined by about 30 percent. Small businesses that were paying Rs 1000 to file the GST returns earlier were now paying on Rs 600 to Rs 700 for the same filing, he said. A number of global agencies have reckoned a decline in India's GDP this year to be around 10 percent.

Thus, the economy is confronted with two contrary indicators. On the one hand, global and ground reports tell of the economy and banking sector being under stress. On the other hand, India's major banks are reaping profits and the Sensex is scaling historic highs.

Indian banks have lent 33 percent of their total loans to large corporates; 33 percent to retail borrowers; 13 percent to international borrowers; 12 percent to small industries; and 9 percent to agriculture. The large corporates, international borrowers and agriculture have been buoyant during the Pandemic hence these lending is good.

One major component of the retail is vehicle loans. According to knowledgeable sources, eighty percent of these have been given to Public Sector Employees. Second major component is personal loans. Ninety four percent of these are given to Public Sector Employees. Third major component is home loans. Fifty percent of these are given to Public Sector Employees and 20 percent to employees of large corporations. The exposure of the banks to the "common man" or the non-Public Sector Employees is relatively less. The Public Sector Employees have continued to enjoy stable incomes during the Pandemic; therefore, the retail lending portfolio of the banks does not show any distress.

Contrary to the ground reports, the lending to small industries also does not appear to be under stress. One should have expected small businesses in construction, tourism and coaching to default on their borrowings. There are three possible reason s for the normalcy in these sectors. One, the Government had placed a moratorium on loan repayments from March to August this year. Borrowers have developed some cushion in this period and are repaying the loans from this backstop. Two, the Reserve Bank has asked banks to be liberal in rescheduling the repayment of the loans hence the repayment has been pushed into the future. Three, the Government has guaranteed additional loans provided by the banks to small businesses. Thus, small businesses may be borrowing under this scheme to keep themselves afloat. The repayment crisis of small borrowers has been pushed back and not appeared in the open because of these steps.

This discussion means that the Indian economy has been divided into two sections. One section is of the sectors that are doing well. These include large corporates, international borrowers, and agriculture which are all doing well; and retail which is driven by Public Sector Employees. Further, the trouble that may be brewing in the small industries' sector is also not visible at present because of the various steps taken by the Government and the Reserve Bank.

This situation could remain stable for some time until the pain of the retail borrowing by the non-Public Sector Employees, and the small industries begins to appear. Today the Public Sector Employees constitute of about two crore in numbers. They may account for about eight crore persons if their family members are counted. The remaining 127 crore out of the 135 crore population do not have a comfortable income and may not be able to repay the loans taken for much time. The relief granted to small industries by moratorium, rescheduling and Government guarantee too is temporary. Their incomes are down but this distress has been pushed into the future. The Indian economy is like oil floating on water making colourful patterns but hiding the stench in the water below.

Two possible scenarios can unfold here onwards. As of now, the Indian economy is showing rising Sensex and declining in GDP. The total economy is shrinking while the share of big corporates is rising. The 127 crore people are unlikely to come out unscathed from the declines in GDP brought by Pandemic given the distress in employment-intensive sectors like tourism, coaching, small industries and construction. Nevertheless, this situation could hide a beneficent future if the Government is able to provide direct cash transfers to all the people to meet their basic needs. In that case one will establish a golden economy where there will not be a need for every person to "work"-as Karl Marx had dreamt. On the other hand, this same could hold dangerous portents if the common man is left to fend for him while the Sensex roars and banks make money. The common man will get agitated and the anger will erupt in one form or the other.

Vol. 53, No. 28, Jan 10 - 16, 2021