Two sides of the loan coin

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Every seasoned hunter knows that langur monkeys are the best noisy indicators that a tiger might be lurking nearby in the thick growth of a jungle. Hunters train their ears to watch out for these monkeys nearby. If they are making a noise, a big cat might be lurking underneath the thick growth and the finer of the hunter quickly reaches for the trigger of the gun. Similarly, when the economy is struggling to emerge out of the woods, economists watch out for a few indicators for growth that can be sustained. One such crucial indicator is credit offtake.

Banks have disbursed more personal loans than credit to the industry in the second quarter (July-September) in the current financial year. This is a sure indicator of the good work that banks have done in pushing retail loans – credit that the individual uses for buying house, vehicles, consumers goods and any sundry purpose. This is an outcome of declining interest rates, aggressive marketing and, to a certain extent, the rising confidence of consumers in spending on discretionary items.

But then, there is another side of the data coin that should trigger a cause for concern. The demand for credit by the industry has always exceeded that of the retail segment. The status in the second quarter indicates companies have not borrowed enough to create new production capacities, which is crucial to generate more jobs in the country. Millions of jobs have vanished in the two savage runs of the Covid-19 pandemic and millions more have suffered wage cuts. According to a study by Azim Premji University’s Centre for Sustainable Employment, the first wave of the pandemic pushed the income of about 23 crore Indians below the national daily minimum wage of Rs 375.

Unless capital expenditure or working capital requirements of companies go up, it would not generate employment. More jobs can give a sustainable push to aggregate demand in the economy triggering an upward spiral. Unless jobs are created the credit offtake in the retail segment would suffer too.

There is yet another irony. To make loans cheaper, the government and RBI consistently pushed for a lower interest rate regime that, in turn, lowered rates of savings instruments that provide interest income to the common people. It might be recalled that the Union government took a revenue hit of about Rs 1.5 lakh on corporate taxes to boost the flagging economy. Therefore, both the common people and public exchequer have made significant sacrifices. Many Indian companies that have reported excellent financial results in FY21 and continues to be in the pink of health should seriously deliberate about creating new capacities. A lean, mean balance sheet is an excellent opportunity to get ready for robust demand in the future.