Pranjul Bhandari makes a case for direct govt intervention in stressed NBFCs
Until NBFCs revive, rural incomes won't revive in a big way, says HSBC Chief India Economist
Talk to us about this case which you are making, why NBFCs are very critical for the health of rural India?
What we found in our research is that rural incomes are quite interlinked with what is going on in NBFCs. The old thinking is rural Indians only do agriculture work, but increasingly, over the last decade or two, the reliance on agriculture has been coming down and rural Indians are going out and doing a lot of other activities, for example construction activity. About 75% of construction is real-estate linked and if you come down to real estate, you will see that they depend a lot on NBFCs for their funding.
In fact, in 2018, 100% of incremental credit that real estate developers got were from NBFCs and not from the commercial banks. If NBFCs are not doing well, then the stress is actually felt in the books of real estate developers in the construction sector and also in rural incomes, which are now far more dependent on construction activity than they were in the past. Just to cut a long story short, until NBFCs revive, we won’t be able to see a big revival in rural incomes.
Last couple of quarters have been terrible for many in the NBFC space. It is a very bad phase for their financial health because raw material, which is capital liquidity, was not easily available. How are you assessing the health of NBFC now?
Not all of them are stressed but those that are stressed, can be segregated under liquidity stress and solvency stress. Thankfully we do have solution of a sort for liquidity stress. The government has announced a Rs 25,000-crore package for real estate companies which are not being able to complete projects and they also have tight inter-linkages with NBFCs. That will help solve some of the liquidity stress but that will not be able to resolve solvency stress in cases where the net worth of the project has gone into negative.
For that, we need a more direct intervention from the government or from the regulators. In some sense, we need a search and rescue operation in which the government actually tries to identify the stressed and systemically important NBFCs and real estate firms. It tries to identify new buyers or new sources of recapitalising them very quickly, while at the same time allowing some of the pre-existing private shareholders to suffer some of the losses.
We need some very direct intervention of the type that we may have seen in the US for example. Of course, it can be a little different in India, but I think the time has come now for direct intervention in case of stressed NBFCs.
It is feared that GDP growth rate may go below the 5% mark in Q2. It may overall remain compressed for long and that is what everybody else is talking about. What is your own estimate of GDP growth from here onwards?
We have a lot of data coming in for the quarter ending September -- both activity data and survey data. All of that is pointing towards a fairly grim quarter. We have the real GDP growth at 4.4% which is a low number. It is lower than the previous quarter growth of 5%. For the third quarter (October-November-December), we already have some data for October and I do not think that is looking much improved. There are some pockets of improvement. Passenger vehicle sales have really gone up and that is important because passenger vehicle sales had become poster boy of the slowdown. But there are a lot of other indicators which continue to remain weak. For example, GST collections, power demand, cargo traffic and so on.
If all this is put together I do not see a major improvement in the quarter ending December also. In terms of our indications, we have brought down the full year GDP number to 4.9% from 5.9% forecast earlier for FY20.