How Indians save, borrow and spend are in for big changes. While the government on Wednesday slashed interest rates on small savings by .2 per cent, industry and trade body ASSOCHAM pointed out on Thursday that there was a slowdown in credit offtake, save by people in the rural sector and the consuming urban class.
“The only segments which are witnessing healthy growth (in terms of credit offtake) are personal and agriculture credit with jump of over 10 per cent,” according to ASSOCHAM.
Simply put, with lowering of interest rates, people will tend to save less in the banking system and experts fear that the money will now go into real estate or gold. And, instead of industries and MSMEs availing credit from banks that have been recapitalised for the specific purpose of being able to advance credit to get manufacturing going, it would be only about farmers taking loans for agricultural purposes, or at best buying a tractor or harvester; and others availing loans to buy houses,cars, air conditioners and the like!
As India moves further into the low interest regime with every revision of interest either by government announcements or the RBI's monetary policy, this savings and borrowings pattern can only get more adverse for the economy.
The interest rates on small savings have been slashed by the government to meet its revenue shortfall at a time when its expenditure on infrastructure to achieve economic growth and generate jobs will have to go up. It does not help that the revenue collection from GST in November has fallen to the lowest since it was rolled out in July.
While some economists are cautioning the government against exceeding the current fiscal deficit of 3.2 per cent of the GDP, others say it does not matter even if international agencies do an adverse rating. The government is slated to borrow Rs 50,000 crore from the market before March 2018, through dated securities.
An ASSOCHAM study finds that “slowdown in economy coupled with high stress level in the banking sector is expected to restrict credit growth at around eight per cent during the current fiscal despite government’s thrust on loan expansion”. It goes on to add that growth in the credit this year would be mainly driven by the retail segment and farm loan.
In case infrastructure development picks up in the second half of the current fiscal, there is a chance that related industry may contribute to credit growth.
The study pointed out that lenders have become risk averse due to mounting NPAs, and companies with good ratings are tapping market as rates are cheaper in the bond markets.
Under pressure to provide jobs, the government has asked the banks that are being refinanced to lend to micro, small and medium enterprises as they have the potential to employ. It was almost the precondition to banks getting Rs 2.11 lakh crore capital infusion that the government announced in October, in a bid to tackle the NPA issue.
Meantime, the NPAs of public sector banks have increased to Rs 7.33 lakh crore as of June 2017, from Rs 2.78 lakh crore in March 2015.
