India’s banks won’t be able to help this time

Image Credit: Mumbai: The world’s largest lockdown is, as expected, taking a toll on the Indian economy. What’s even more worrying is how the costs of a slowdown - the sudden pressure on incomes and demand, in particular - will widen pre-existing cracks in the Indian growth story. In the six years since Prime Minister Narendra Modi took office amid a wave of optimism about the Indian economy, retail loans have gone only one way: up. The credit bureau CIBIL found last year that unsecured personal loans had the lowest default rate of any category they studied - only 0.5 per cent. Questions were already being raised about that story as India’s shadow banking sector - a big lender to the underbanked millions - reeled from a series of defaults. Investors punished Kotak Mahindra Bank Ltd. last week for taking a realistic view of what COVID-19 is likely to do its loan book. The management at HDFC Bank Ltd. - till this week India’s third-most valuable listed company - sounds much more confident and its stock wasn’t hurt as much, although it is more exposed to unsecured loans than its peers. Banks reeling from a fresh batch of bad loans won’t be able to provide the credit that fuels a recovery. One of the ways in which they survived the last catastrophic demand collapse - Modi’s 2016 decision to withdraw most of India’s cash overnight - was by stepping up borrowing from banks. Despite warnings, India’s government waited too long to fix the banks, thinking that it had all the time in the world.