Credit demand in the economy is still pretty okay, says CEA Subramanian
If fundamentals had changed drastically, then demand would have been very, very low.
The Indian economy is battling a severe demand slowdown and liquidity crunch which resulted in economic growth rate falling to a six-year low of 5% in the June quarter. On Tuesday, IMF slashed India's GDP growth projection for the year 2019 to 6.1%. Earlier, the World Bank said India's growth rate is projected to fall to 6% in 2019 from 6.9% of 2018. What do you have to say about the state of the economy?
I would say there has been some downward revision of growth rate. But I would continue to emphasise that in the long run, the fundamentals remain unchanged and therefore we will be back to the growth rate that we deserve to be at, in the near future.
The IMF has also pointed to the NPAs in the banking sector and said that more reforms are needed. The banking sector also has become the central focus of the war of words between the finance minister as well as the former Chief Economic Advisor and the RBI Governor Raghuram Rajan. Every time we say the worst is behind us, a PNB or a PMC issue crops up. When can we say that all the crises would be put behind us? When can we say now we can start from a clean slate?
I think we have to be careful in understanding the distinctions in the question that you have framed. The urban cooperative banks have a different set of issues.
The Nirav Modi episode at Punjab National Bank (PNB) for instance has aspects that are actually related overall to the banking operations, but when we have been talking about NPAs primarily, it is on the lending practices and there has been an improvement in the process of lending. The fact that banks are being allowed to take commercial decisions by themselves, is as one would expect. In fact, we have seen in the data that banks have become more careful and that is again something which is expected.
The NPA crisis that we have gone through has made us aware of some of the aspects that we need to be thinking more deeply about and which we are doing.
Since you are saying that you are thinking more deeply about what is brewing in the banking sector, I would want to know more about it.
I would not say brewing. I would say these are aspects that we need to think about and aspects that we may need to tweak for a fix.
But which direction should we move in because IMF has also pointed out the need for reforms. So, what exactly is it because the government has adequately capitalised the PSU banks. Plus we are pushing the mergers of PSU banks. What more reforms are being done?
This is something which I have been advocating. The world over, banks use a lot of technology to help with their lending decisions. In my own work on this area, I have seen how their predictive modelling can be very useful. One key area, where substantial rewards can be expected is investing. Banks are using a combination of artificial intelligence, machine learning etc. not only to screen borrowers but also to monitor them regularly, because when you give a five-year loan, the assessment of the credit at the start of the loan versus may be one year or two years down the line, can change and it is a dynamic scenario.
We have been able to implement so much of technology in many areas. Our public sector banks need to be investing a lot more in technology to be able to screen borrowers because the primary focus has to be on being able to assess and monitor the larger borrowers well. This, in the context of mergers, would actually help because investments in technology require a certain economies of scale because technological investments benefit from economies of scale. This should be an opportune moment to be able to invest in cutting-edge technology, which is what banks world over are doing and which public sector banks also need to be investing in. That is something we are working on.
The banks have been giving out loans in a big way -- almost over Rs 80,000 crore is what we heard from the government. But having said that, the RBI in a report recently said that the credit growth is at a two-year low. You said the banks have been a little more careful. So, is it the banks being careful or is it the fact that there is no demand in the economy for loans?
This is a point that we have analysed very carefully. It is my own assessment that the demand for credit is still pretty okay. If you look at the breakup in terms of the growth of credit among the private sector banks and the public sector banks, the credit growth slowdown overall has not been as much in the private sector banks.
If it were a demand side issue, one would have seen an equally sharp change in both sets, but that does not seem to be the case. As it happens the world over, as they say in Hindi; doodh ka jala mattha bhi phook-phook ke peeta hai (once bitten, twice shy). And that is a commercial decision. So, some care has been taken. I think our public sector banks are calibrating into it and some slowdown has happened in credit but I would attribute it not as much to demand side factors even when looking at other data sets -- loan enquiries etc. The demand for credit is pretty okay, which basically cycles back to what I was saying earlier about the fundamentals. If for instance, fundamentals had changed drastically, then demand would have been very, very low.
Isn't the fact that PSU banks are not lending is also a reflection of that?
I would not say not lending, actually it has just been that there has been a slowdown in the growth rate. You have to be very careful with what we say.
But having said that, how would you restore the confidence of PSU bankers so that they lend more because they themselves have to be the big drivers in the economy if there is no demand slowdown?
As I have already mentioned, technology can make a big difference here.
But isn’t that a long-term thing?
No, it is not a long-term thing. Actually even just using the data that we currently have, it is a matter of being able to implement some of those models and some assurance has been given by the public sector banks that they will look at this process in terms of the working capital versus term loans together. They are also cognisant of this particular fact and I am pretty sure they will work on what is necessary.