The world’s largest lockdown is, as expected, taking a toll on the Indian economy. As per Fitch Ratings, India would grow only 2% in the current financial year.
Why fighting a novel virus is turning out to be costly?
The sudden pressure on incomes and demand due to the COVID-19 outbreak is likely to weaken the Indian growth story. The weakest link in fighting the pandemic in the Indian economy is its banking sector. Many banks have still not recovered from over-exuberant lending to the industry back in the boom years. This economic slowdown, which for some time has deferred private investment in India, is likely to widen pre-existing cracks.
Even as the country’s growth rate declined, Indian households were willing to keep buying things. Thus, banks could rely on strong household demand propelled with credit. Retail lending seems like a safe bet. Giving people more purchasing power with a wide range of innovative services— the low interest rate on personal loans, credit cards, home equity lines of credit and mortgages.
Is granting a moratorium of three months on loan installments helpful?
Recently as part of its post-coronavirus intervention, the Reserve Bank of India permitted banks to grant a moratorium of three months on loan. However, this step is less likely to help the borrowers as they still would have to pay the money and interest is still going to add up.
It’s important that the Indian banking sector remains stable throughout this lockdown, otherwise, it could act as the vector and complicate the path for growth to recover after the lockdown.
Post-2016 demonetization, retail loans in India grew much faster than overall bank credit- mainly personal loans, which in turn, kept Indians going through the lean times. However, now it could be too late as sustaining the financial impacts due to lockdown could be difficult and India can’t count on banks to lead virus recovery.