The economic downturn began with IL&FS defaulting on loans over Rs.1 lac crores, sometimes in September 2018. NBFCs were selling their bonds to MFs on short term borrowings, which matured and had to be paid back. The scam-hit Mutual Funds stopped funding to the NBFCs, and the matured loans had to be repaid to the Mutual funds. NBFCs withdrew more than Rs.3 lac crores from the market, of which about Rs.2 lacs were paid back towards their liabilities. Following the IL&FS scandal, the NBFCs were not getting money to lend further into the market, causing a liquidity squeeze, which soon had a contagion effect on the auto and realty sector among others. It may be noted that nearly 95% of the auto loans are financed by NBFCs, or their agents.
The auto woes were compounded by unplanned policy announcements over the switch-over to Bharat VI norms from the year 2020 and more importantly the changeover to Electric vehicles from 2025. The new axle rules quickly crippled the truck manufacturers like Ashok Leyland, a leader in the field has lost 70% sales in August. The steep fines imposed on overloading of trucks and traffic violations have further dampened the mood of new investments by the consumers.
The RERA rules prevented diversion of money by the realty industry. Banks had virtually pulled back lending to the housing sector, and it was the NBFCs which had come to the rescue. This has resulted in significant scale suspension of work in the construction sector as the NBFC funds have suddenly vanished. Of the total bank lending in India of about Rs.97 lakh crores, Rs.24 lakhs are the NBFCs, which might explain the liquidity problem.
With job losses of nearly a million from the auto sector alone, half a million from the realty industry, the banning of plastics is also expected to result in job losses of another two lacs, mostly from the small sector. There has to be a balance between human survival and commitment to the environment.
The light in the distant tunnel is that the government has braved to touch the Rs.1.76 lakh crores, though still keeping a brave face over the economy and rubbishing the recession fears. It depends on how the money is going to be spent, which has not been spelt out until now. Banking reforms, though cosmetic, might move in the direction of imagery of lesser bad loans. The banks do have funds, SBI alone with Rs.1 lac lendable crores, which they are tightly sitting on, unwilling to spread out amid fears of businesses collapsing.
There is no magic except the sullen mood has to be reversed. For this
1) The government has to increase its spending.
2) Banks will have to loosen their purse strings to improve the liquidity and money flow.
3) The introduction of electric vehicles should not be forced on the auto industry and so should be the forced conversion to Bharat VI norms until the sector is vibrant.
4) It is the Manufacturing sector and especially the MSMEs which have to be strengthened and promoted.
Lastly, what we are witnessing is a precursor to the recession, the degree of the worst is yet to come and depends on the government’s initiatives to admit and tackle the crisis.
Sampath Kumar
Intrépide Voix
