Piramal Group chairman Ajay Piramal on Friday expressed concern over the high real rates of interest in the economy, saying that the cost of money needs to come down for private capex to pick up momentum.
“At about 2.3%, real rates in India are the highest among the top five economies in the world. This is one of the reasons there is not enough investment taking place,” Piramal said. He was speaking at the Financial Express Modern BFSI Summit. Piramal doesn’t see interest rates coming down this year.
Moreover, the veteran industrialist believes that credit is not growing fast enough to support a 7% growth of the economy. “It is growing at about 16% now, but we need it to grow at a faster pace of around 18% if we are to accelerate the growth of the economy,” he said.
Piramal observed that banks have become more risk-averse in recent times, as a consequence of which companies with a lower credit rating lose out and do not get access to formal credit. “There are many companies on the verge of becoming bigger and need financial support,” he said. In this context, Piramal noted that companies today are accessing private credit and paying very high rates of 15-16%.
He also stressed the importance of the bond markets in disseminating credit, pointing out that the market was still very small. “The markets remain skewed towards gilts with 70% of funds invested in government bonds,” Piramal said, adding that even of the remaining 30%, much of the money was invested in top-rated bonds.
The Piramal Group chairman is of the view that the Reserve Bank of India (RBI) should consider giving more licences for deposit-taking non-banking financial companies (NBFCs), especially since regulatory oversight has been strengthened. This would enable the shadow banking sector to play a bigger role in the economy. “Only five of the top NBFCs today have a licence to mobilise deposits. Since 1997, no licence has been given,” Piramal said.
While NBFCs are well-positioned to meet the credit needs of small enterprises, they need to diversify their source of funds, he said. “Currently, banks account for 55% of our borrowings,” he added.
Piramal further said that small enterprises could generate more than 100 million jobs, but less than 5% of total credit was being channelled into this space. “The sector makes a very big contribution to exports, so it needs credit,” he said. This was also important to ensure that the economic recovery did not remain K-shaped, Piramal added.
NBFCs, he said, could play a complementary role in boosting credit.