A consumer credit crisis in India could affect economic recovery

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One major risk to India’s economic recovery is that millions of households and small businesses may be cut off from the credit they need, according to JPMorgan’s chief emerging economist.

The government, central bank and analysts are underestimating the extent of permanent scarring that can occur in South Asia’s largest economy as a result of the contraction caused by the pandemic last year, Jahangir Aziz said on CNBC’s “Squawk Box Asia” on Friday.

Loss of income

The loss of income related to the coronavirus pandemic has been billions of dollars annually, according to Aziz. “We know that public companies have not suffered as much. Therefore, SMEs (small and medium-sized enterprises) and households must have suffered a much bigger blow,” he said.

These include workers in the informal sector such as day laborers, as well as service and domestic workers.

“I just cannot imagine that such loss of income would not seriously damage the balance sheets of households and SMEs,” added Aziz.

He said much of it hadn’t appeared in lenders’ loan books because of the Reserve Bank of India (RBI) debt moratorium last year. To mitigate the economic impact of the lockdown, the central bank announced last year that lenders were allowed to allow borrowers a temporary delay in monthly loan repayments between March and May. It was later extended to August.

“But the debt moratorium doesn’t solve the problem, it just puts it off until the second half of the year,” said Aziz.

People stand in a queue in a bus shelter in Mumbai, India.

Ashish Vaishnav | SOPA pictures | LightRocket | Getty Images

India’s credit problems

India’s micro, small and medium-sized enterprises contribute around 30% of nominal GDP, and the sector is the country’s second largest employer after agriculture, according to the central bank.

To support these companies, RBI introduced emergency credit systems and introduced policies such as interest rate cuts, a moratorium on debt servicing and a one-time loan restructuring package.

According to local media reports, lenders said most of the one-time restructuring option has been used for corporate loans and very few for retail loans, meaning either people are paying back on time or a bad debt crisis may be lurking.

Another concern is that with bad balance sheets, small and medium-sized businesses may not get the credit they need in the future. This is because lenders may only lend to larger companies that have been relatively better off through the crisis. Or they may ask smaller companies to pay a higher loan premium. The financial sector was already struggling with bad debts before the pandemic.

“One of the main risks I have is that just when we want credit to be taken out there will be a whole bunch of people and SMEs who can’t get credit,” said Aziz.

In its semi-annual financial stability report published in January, the RBI assumes that bad debts will rise to 13.5% by September, which corresponds to a doubling from 7.5% a year ago. If the situation worsens, bad loans can rise as much as 14.8%, the central bank said.