Credit-lending: How can it revive growth in a post-pandemic era?

Credit-lending: How can it revive growth in a post-pandemic era?

First time since India’s independence, the country registered a financial recession, though a ‘technical’ one, in the wake of the COVID-19 outbreak and the subsequent lockdowns to check the spread of the virus. The first two quarters of Financial Year 2020-21 clocked respective negative growths of 23.9% and 7.5%. However, the numbers, somehow, do not present the clear picture of India’s economy.

Financial analysts across the world agree that the Indian economy is just hit by the flu due to the pandemic and that there is no chronic ailment in the system. The argument received widespread support from world’s leading financial institutions like the World Bank, International Monetary Fund, and Asian Development Bank, among others, as they revised their growth estimates of the Indian economy for the better.

Credit Lending To Revive Economy

It needs no expertise in Economics to understand that the country’s tardy pace of financial growth comes on the back of a dip in economic activities during the months of lockdown. Even as we are gradually coming out of the pandemic, consumer spending remains below normal. If this condition prevails, bouncing back will become challenging.

Hence, more money needs to be pumped into the market while sidestepping the risk of inflation. Significantly, credit lending can help in increasing the purchasing power of consumers, thereby increasing spending, and thus increasing economic activity. The sales figures during the festive period around Diwali have already shown us how Indian consumers bought gadgets and vehicles on loans, bringing cheer among traders.

Now, we must focus on continuing the momentum. In this regard, digital banks can play a humongous role as they are already the go-to option of youths when it comes to credit lending. The young generation of the country prefers digital banks as they provide the facility of instant loan and ask for minimum documentation. According to multiple surveys, the consumer behaviour in India has radically changed and people today don't mind going for loans to cover their immediate expenditures like going on a vacation, buying a gadget, gifting their beloved, and for other such reasons.

Credit Demand

It is true that the animal spirits of entrepreneurs are chained at present and businesses are not yet ready to risk investing big bucks on something and hence, the demand for credit has gone down quite considerably. While the government and the RBI are already making solid attempts to unleash business spirit, it is upon banks, especially the digital ones, to ensure that every genuine demand for credit is looked into. Fortunately, the demand for small amounts of loans (less than Rs 5 lakh) has not been hit very hard. More recently, some signs of a mild recovery in both credit demand and its supply can be seen with an uptick in sales of automobiles and other commodities.

 Dodging the NPA bullet

The small loans make for the most suitable way to up consumer spending and revive the economy as the risk of bad debt is minuscule. Our Prime Minister Narendra Modi rightly pointed out, “Middle class lives with dignity and contributes the most when it comes to running the country. Their richness lies in their attitude to pay back loans.”

Therefore, the risk of non-performing assets (NPA), as it is the case with large businesses, is very low and the banks would not have to worry about putting good money behind bad money. Additionally, the small and medium enterprises (MSMEs) — that suffered huge losses due to the pandemic — are in much need of a kick-start. Being the biggest job providers, infusing money in MSMEs will ensure job opportunities along with growth.

Way ahead

Embracing a new normal, it is upon banks to adopt digitalization and reducing their operating costs. To create more comprehensive credit scorecards, machine-driven credit decision-making and use of non-traditional sources of data powered by analytics have become the need of the hour. Tech-enabled models make banks more agile, increase recovery rates at reduced costs, and also improve customer experience.

At present, economists are divided on the recovery of the Indian economy. Some say it will be ‘V’ shaped, some argue for ‘U’ shape, and some even predict a ‘W’ shaped recovery. While the shape of recovery remains unclear, it can certainly be said that we face an uphill task of bringing the economy back on track. And credit lending can help greatly to the cause. Thus, banks need to go digital while realigning their business models to emerge stronger from this pandemic and help in the reviving of our economy.

The above column has been contributed to Mumbai Live by Matthew Flannery- CEO and cofounder - Branch personal finance app