A key threat to India’s economic recovery is that millions of households and small businesses could be cut from the credit they need, according to JPMorgan’s leading emerging markets economist.
The government, the central bank, and analysts are disregarding the level of permanent scarring that can occur in South Asia ‘s largest economy as a result of last year’ s disease – led contraction, Jahangir Aziz said Friday on CNBC’s “Squawk Box Asia.”
Loss of income
Revenue losses associated with coronavirus infection have run to billions of dollars each year, according to Aziz. “We know that these registered companies have not suffered so much, so the SMEs (small and medium enterprises) and the families must have taken a much bigger blow,” he said.
That includes staff in the informal sector, such as day workers as well as service and domestic staff.
“I can’t imagine that with that kind of loss of income, you won’t have a real negative impact on household and SMEs balance sheets,” Aziz said.
He explained that not much of it is yet to appear in lenders ’loan books due to the Reserve Bank of India (RBI) moratorium on debt last year. To mitigate the economic impact of the lockout, the central bank said last year that lenders were allowed to give borrowers a temporary delay on monthly repayments between March and May. It was extended to August.
“But a debt moratorium doesn’t solve the problem, it just pushes the problem to the second half of the year,” Aziz said.
People stand in a queue at a bus shelter in Mumbai, India.
Ashish Vaishnav | SOPA Images LightRocket | Getty Images
India’s credit concerns
India’s micro, small and medium enterprises contribute around 30% to the nominal GDP and the sector is the second largest employer in the country behind agriculture, according to the central bank.
To support these businesses, the RBI introduced emergency credit schemes and implemented policy measures such as interest rate cuts, a moratorium on debt servicing and a one-time loan restructuring package.
According to local media reports, lenders said that most of the one-time restructuring option was called for corporate loans and very few for retail loans, which means that both people repayment on time or a severe debt crisis could be fattening.
Another concern is that, with weak balance sheets, SMEs may not get the loans they need in the future. That’s because, perhaps, lenders may choose to lend only to the big companies that have grown to a better level during the crisis. Alternatively, they could charge small businesses a higher cost. The financial sector was already struggling with bad debts before the pandemic struck.
“So one of my main risks is that, just when we want to build credit, there will be a handful of people and SMEs who can’t get credit,” Aziz said.
In its semiannual Financial Stability Report published in January, the RBI said bad debt is expected to rise to 13.5% by September, almost doubling from the 7.5% seen a year ago. If the situation worsens, non-performing loans could rise by as much as 14.8%, the central bank said.