Bharat Jhunjhunwala
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 per cent decline in their profits by June 2020. A report by global consultancy group Deloitte says banks in Hong Kong are making large provisions to bear the expected losses due to the pandemic and their profits are under pressure. Our banks have bucked this global decline and our major public sector and private banks are showing higher profits. At the same time our share market is buoyant and has touched historic 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 business of schools and coaching centres had almost come to a standstill. Another said that borrowers are reducing their personal expenditures and repaying loans to banks because they are afraid of penal actions. Yet another said that borrowers were not able to encash the post-dated cheques given to lenders at the time of taking loans. A Chartered Accountant from Faridabad said that business of his clients had declined by about 30 per cent. Small businesses that were paying `1000 to file GST returns earlier were now paying `600 to `700 for the same filing, he said. A number of global agencies have reckoned a decline in India’s GDP this year.
Thus, we are confronted with two contrarian indicators. On the one hand, global and ground reports tell of our economy and banking sector being under stress. On the other hand, our major banks are reaping profits and the Sensex is scaling historic highs.
The composition of lending by our banks helps us unravel this mystery. Our banks have lent 33 per cent of their total loans to large corporates; 33 per cent to retail borrowers; 13 per cent to international borrowers; 12 per cent to small industries; and 9 per cent to agriculture. The large corporates, international borrowers and agriculture have been buoyant during the pandemic hence this lending is good. We need to look closely at the lending to the retail and small industry sectors.
One major component of retail is vehicle loans. According to knowledgeable sources, eighty per cent of these have been given to government employees. Second major component is personal loans. Ninety four per cent of these are given to government employees. Third major component is home loans. Fifty per cent of these are given to government employees and 20 per cent to employees of large corporations. The exposure of banks to the ‘common man’ is relatively less. The government employees have continued to enjoy stable incomes during the pandemic; therefore, the retail lending portfolio of banks does not show distress.
Contrary to ground reports, the lending to small industries also does not appear to be under stress. We should have expected small businesses in construction, tourism and coaching to default on their borrowings. There are three possible reasons for normalcy in these sectors. One, the government had placed a moratorium on loan repayments from March to August. Borrowers developed some cushion in this period and are repaying loans from this backstop. Two, the RBI has asked banks to be liberal in rescheduling repayment of loans hence repayment has been pushed into future. Three, the government has guaranteed additional loans provided by 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 the Indian economy has been divided into two sections. One section is of sectors that are doing well. These include large corporates, international borrowers, and agriculture which are all doing well; and retail borrowing which is driven by government employees. Further, the trouble that may be brewing in the small industries’ sector is also not visible at present because of various steps taken by the government and the RBI.
This situation could remain stable for some time until the pain of retail borrowing by non-government employees, and small industries begins to appear. Today the government employees constitute of about two crore in population. They may account for about eight crore if their family members are counted. The remaining 127 crore population does not have a comfortable income and may not be able to repay 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 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 economy is showing rising Sensex and declining GDP. The economy is shrinking while the share of big corporates is rising. The 127 crore people are unlikely to come out unscathed from this decline in GDP 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 people to meet their basic needs. In that case we 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 himself 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.
The buoyant performance of the Indian banking sector—contrary to both ground reports and global movements—is like a person moving cleverly to the high end of the sinking ship thinking that he will save himself. The challenge before the government is either to persuade the 127 crore people to accept their distress without demur; or to make direct cash transfers to enable them meet their basic needs.
The writer is a former Professor of Economics at IIM Bangalore.