Credit quandary

While Nirmala Sitharaman introduced what is being considered as the second wave of the government's efforts to revive the economy, by announcing a series of banking reforms, including the merger of 10 public sector banks into four entities; at least one of the reasons cited by the Union Finance Minister justifying the move is untenable. Sitharaman had claimed that these merged banks would lead to the creation of big banks with an enhanced capacity to give credit and would also be able to compete globally.

But Indian banks competing in the global market is merely a pipe dream. In the first place, there is no need for them to compete in the global marketplace. More importantly, even the biggest Indian bank, State Bank of India, is nowhere close to being in the same league as JP Morgan Chase, Bank of America, Citi or even HSBC. A global Indian bank, as of now, is a misnomer; although a people, large enough as one-sixth of the world's population, certainly deserve one.

The minister further claimed that the merger will enhance the capacity of the concerned banks to increase their credit disbursal. This presumption also needs to be proved, at least in the case of retail credit, because, often, it is not the lack of capacity that deters banks from lending to retail credit seekers but a skewed policy that always works in favour of big-ticket borrowers.

Banks, by way of name lending as their best credit strategy, have burnt their fingers by amassing toxic assets, mostly on account of lending to projects and people of questionable credentials. And in a knee-jerk reaction, they have now suddenly applied the squeeze, crowding out ordinary borrowers from the credit market.

There is no doubt that the first step to revive the economy, which is now in dire straits, is through raising demand at all levels, including retail. The lack of demand is not only slowing the economy down but also affecting the investment outlook, as testified by Shaktikanta Das, the RBI governor, at a Monetary Policy Committee meeting in the early part of August. From provision shopping to big-ticket spending, such as vehicle purchases, customers simply do not have the money to buy.

The automotive industry has been crippled and forced to lay off workers and cut production as inventories keep building up at an alarming rate with no buyers. The lack of demand is not due to the disappearance of an aspirational market, which, given the present population profile, can only grow. It is because car finance has totally dried up. With banks strictly following new norms put out by the Credit Information Bureau (India) Ltd (CIBIL), it is virtually impossible to get a car loan these days for any customer with a certain exposure to banking credit.

The inherent contradiction with this approach lies with the fact that CIBIL is trying to apply first world standards to third world situations. Credit rating agencies need to go back to the drawing board to be able to come up with solutions that can be applied in the Indian context rather than simply copy-paste templates of western credit norms as there is a huge disparity in awareness levels of both populations with regards to personal creditworthiness in mature economies.

In India, the very concept of personal creditworthiness is yet to take hold and it would take years of financial education and credit-denial for people to get used to the new idea. This arbitrary application of western standards has shifted large sections of the Indian population away from the credit universe.

And this includes large numbers of youth, who have taken education loans for their higher education but may have delayed or defaulted on payments for one reason or the other, without realising that doors of bank credit have been shut for them permanently. Under CIBIL's blatantly arbitrary application of norms, small deviations being blown out of proportion end up spoiling people's credit records. These youth hardly ever realise that when they take up education loans, they are actually walking into a trap from which there is no escape whatsoever.

It is a hard fact of life that our credit seekers are not yet ready to western concepts of personal credit rating that are fancied. This, especially when credit rating agencies here have looked away while the big fish kept eating away at their nets.

While the government's efforts to revive the economy is inclusive of introducing various stimulus packages, this aspect of the retail credit market needs to engage greater attention. The problems of the retail credit market need to be scrutinised and remedies need to be worked out. And of course, CIBIL's role in creating the current situation, where lack of demand is frustrating every effort to shore up the economy, needs to be examined. Credit squeezes are often caused by the misdeeds of the big fish but their worst victims are always small borrowers. IPA

(The views expressed are strictly personal)