‘Loan fairs infused ₹1.8 lakh crore in economy’

The government’s recent drive to boost consumption through loan melas (fairs) organised by banks and other financial institutions in about 400 districts could result in an estimated credit flow of around ~1.8 lakh crore, and its full impact on the economy is expected in the coming quarters, a top government official said on condition of anonymity.

In the first phase of the customer outreach initiative (October 1-9, 2019), public sector banks (PSBs) disbursed Rs 81,781 crore, including new term loans of Rs 34,342 crore. It is estimated that credit disbursal in the second phase (October 21-25, 2019) was around Rs 1 lakh crore, a finance ministry official said, asking not to be named.

The government on September 19 directed state-run banks to provide liquidity support to non-banking financial companies (NBFC) and asked both sets of financial institutions to hold loan melas in 400 districts during the festive season to boost consumption and accelerate economic growth.

The first official added that the move has already started showing results, and claimed it has helped arrest declining automobile sales. Sales of passenger vehicles saw a marginal rise of 0.3% in the month of October after 11 months of decline. It isn’t clear how much of the money disbursed in the two phases of the loan mela was through automobile loans.

The official said an infusion of over ~1.8 lakh crore in credit disbursal in just one month is bound to boost consumption and added that the trend is likely to continue in the coming months. The banks’ outreach focused on loans to new customers, particularly homebuyers and other retail consumers, farmers, and micro, small and medium enterprises (MSMEs).

The loan disbursal camps or loan melas were held in two rounds – the first round covered 226 districts and the remaining districts were covered in the second round. India has 718 districts.

The loan melas are among the measures announced by the government to combat the slowdown. The Indian economy grew by 5% in the three months ended June, the slowest rate of growth in 25 quarters. In recent weeks many financial institutions and agencies have revised downward their estimates of growth for 2019-20. For instance, Moody’s Investors Service cut India’s economic growth forecast for the current year to 5.6% from 5.8% and State Bank of India pared its projection to 5% from 6.2%.

Experts said the loan melas could provide a temporary fillip to the economy.

“These loan melas coincided with the festive season and would have led to a spurt in consumption demand amounting to about 1% of GDP. This will broadly reflect in consumer demand for non-durables,” said DK Srivastava, chief policy adviser, EY India. “Some improvement in growth is expected in the third quarter of FY20. But, the overall effect is likely to be seasonal in nature and may ebb out after November 2019.”

Ranen Banerjee, leader - Public Finance and Economics, PwC India, said, “The initiative has been a good move towards stimulating consumption. However, we will have to wait to see the uptake given the higher household indebtedness and weak sentiments as per RBI [Reserve Bank of India] survey on household perceptions.”

The government’s hope is that the channelling of credit to retail borrowers will boost demand and to enterprises, spur economic activity. The Union Cabinet also recently approved a previously announced scheme to revive stalled housing projects by providing debt financing to them from an alternative investment fund with an initial corpus of ~25,000 crore. Around 458,000 housing units are stuck, and the government believes that reviving them will provide a boost to the economy apart from relieving the economic and mental stress of homebuyers.

While reviewing the loan outreach programme on October 14 and banks’ plan for the second phase of the initiative, finance minister Nirmala Sitharaman asked them to focus on MSMEs in addition to home loans, vehicle loans, agriculture loans, education loans, and other personal loans. “It was reiterated that the outreach would be without any dilution in diligence or underwriting standards,” the finance ministry official cited above said.

In the review, it was emphasised that PSBs would continue to support non-banking finance companies (NBFCs) and housing finance companies (HFCs). Since the IL&FS default in September 2018 till October 10, 2019, PSBs sanctioned a total support of ~3.97 lakh crore in the form of credit as well as pool buyouts of ~1.07 lakh crore, including ~15,455 crore under the newly-launched partial credit guarantee scheme.