Private consumption, the main engine of the economy, suffered a major blow with year-on-year growth of just 3.1%, the lowest since Q3FY15, and the government has now been striving to arrest the decline.
Finance minister Nirmala Sitharaman on Thursday met top executives of private banks and key financial institutions, who told her that demand was visible in rural India and among small borrowers, and that it would pick up further in the upcoming festive season.
Addressing reporters after the meeting, the minister said no lender told her that there was any liquidity problem, and if there was any slight shortage, it was in the wholesale segment and not for retail customers. Moreover, appetite for credit remains strong in the services sector.
In a rather unusual sight, the media briefing also saw an active participation of key private players — from Uday Kotak, CS Ghosh and V Vaidyanathan to Renu Sud Karnad — who spoke at length on consumption in various sectors and expressed their desire to complement the government’s efforts to ensure greater credit flow to critical sectors.
Asked what steps the government would like to take to assuage concerns about the crisis-ridden Punjab and Maharashtra Cooperative Bank, the minister said at this stage, the government was monitoring the situation and would intervene only if it was deemed necessary to protect the interests of depositors. “At the moment, the RBI is doing its bit,” she added. The bank is facing restrictions and RBI has capped the daily withdrawal limit for depositors at Rs 10,000 for now.
The minister asserted that the slowdown in sales of commercial vehicles was seen by banks and NBFCs as cyclical, which will correct in 1-2 quarters.
Similarly, the fall in passenger vehicle sales has been mostly driven by sentiments. Sales of key auto companies, including Maruti Suzuki, which account for 85% of industry sales, reported close to a 32% decline, a record, in August from a year before.
As for housing, Sitharaman said she got a request from lenders to raise the ceiling of affordable housing from Rs 45 lakh to Rs 50 lakh.
“Today’s meeting tells me things are really looking up. The message I get is consumption is picking up and I think demand will only get better in the coming quarters and drive the economy to a higher growth trajectory,” Sitharaman said, describing the meeting with the banks and financial institutions as “tonic type”.
Asked if the government was considering any special provision under the Insolvency and Bankruptcy Code, the minister replied in the negative.
Finance secretary Rajiv Kumar said the private lenders and other financial institutions also decided to hold “loan shamianas” ahead of the festive season in as many districts as possible, complementing the efforts of public-sector banks (PSBs) to improve credit flow. Private-sector players spoke to the media and said they would be happy to participate in the shamianas. The finance secretary, however, stressed that no PSB had been asked to extend loans without proper due diligence.
Apart from the minister and top finance ministry officials, prominent participants include Uday Kotak, vice-chairman and managing director at Kotak Mahindra Bank; CS Ghosh, MD of Bandhan Bank; Renu Sud Karnad, MD of HDFC; V Vaidyanathan of IDFC Bank; George Alexander Muthoot of Muthoot Group and SK Hota, MD of National Housing Bank.
Sitharaman’s meeting with top executives of private banks and financial institutions comes after she made a forceful pitch to PSBs on September 19 to undertake “loan shamianas” in around 400 districts across the country to show that loans were no longer scarce to eligible customers. The minister also announced a massive cut of close to 10 percentage points in corporate tax last week, and banks are among those that stand to gain the most. To offer succour to MSMEs, the minister had also asked PSBs to take advantage of an existing RBI circular more vigourously and ensure that no stressed loan of MSMEs that was still standard be declared non-performing asset by March 2020.
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The finance ministry last week said, as of August end, growth of overall bank credit touched 10.1% from a year before. It said loans extended to key sectors remained robust—banks disbursed Rs 11.83 lakh crore to the MSME sector in FY19, against Rs 8.53 lakh crore in FY18; their home loan disbursement touched Rs 2.19 lakh crore in FY19, up 21% from Rs 1.81 lakh crore in FY18. However, export credit continues to contract; to reverse this, the central bank last week relaxed the priority-sector lending norms.
The economic growth collapsed to a 25-quarter low of 5% in the April-June period. Private consumption, the main engine of the economy, suffered a major blow with year-on-year growth of just 3.1%, the lowest since Q3FY15, and the government has now been striving to arrest the decline.
In recent months, the finance ministry has further bolstered monitoring of credit flow to various sectors, especially to NBFCs, automobiles and MSME, growth in which are faltering. While some of the NBFCs are facing solvency issues, sales of key auto companies have dropped, inflating inventories. The stress in the NBFC sector, which accounted for a sizeable chunk of credit for automobiles purchases in recent years, following the IL&FS crisis has only aggravated the scenario.