Daily Answer Writing
03 March 2021

Q) What impact can reduced credit appetite have on the Indian economy? Enumerate the steps required to re-energize credit growth. (150 Words)

Source : The Indian Express Editorial Page: CONCERNS ABOUT CREDIT

GS 3: Indian Economy

 

Approach Answer: 

Introduction: In a recent study named ‘Sectorial deployment of bank credit’ RBI pointed out the credit deceleration in the economy. The large industries, which constitute 82% all credit off-take to the industries were unable to get credit. “Owing to the stressed assets in large industries, there was a general reluctance on the part of bankers to lend to these industries. Similarly there is a deceleration in the personal loans too. Only the credit to MSMEs showed a slight improvement owing to Atmanirbhar Bharat package.


Risks for Indian economy due to slow credit growth:

    1. Slowdown in GDP: The liquidity in the market is generally associated with the GDP growth rate. Limited credit in the market generally points towards slower GDP growth.
    2. Ripple effects: It would inevitably lead to an economic impact on other sectors. For example, deceleration in the home loan segment  may have adverse effect on sectors like steel, cement and construction.
    1. Personal Loans decline means weak consumption demand in the future. This too is not a good news for economic recovery.
    2. Bad cycle: The economic shock from the pandemic will add greater pressure to bank balance sheets. The RBI now expects banks’ bad loans to rise to 13.5% by September 2021, up from 7.5% in September 2020 in its baseline scenario.
    3. Heavy Dependence on Government Expenditure: Due to decline in private consumption, the government would have to spend more. This would be a problem for the future due to rising fiscal deficit, debt levels and inflation.

 

Steps required to reenergise Credit growth

    1. Resolving NPA: The idea of formation of government backed asset management company might help.
    2. Interest subventions to large industries too: as it has been successful for the MSMEs.
    3. Write-offs of debt and government dues: some sectors such as telecom require write-off to avoid unemployment crisis.
    4. Production subsidies: To allow continuous production in the industries to keep employment  level high.
    5. Increasing Expenditure in the rural areas: Schemes such as MGNREGS can be helpful to boost the consumption demand, which can indirectly boost credit uptick.

 

Conclusion: The Atmanirbhar Bharat package had may schemes such as credit guarantee and  interest subvention schemes which had allowed adequate credit to the MSME sector. Similar model can be adopted for other sectors. Apart from this the PLI(Production linked Incentive) can be a boost too for the industrial sectors.

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