Trust: Lost somewhere in the loan mela

With growth in India slowing down over the last few months now, infusing a new shot of life into the country becomes important. The NBFC crises that had rocked the country affected both the number of people to whom credit was available and the extent to which it was available. To address the issue and increase credit growth in the country especially at a grassroots level, the government had started loan melas where public sector lenders actively reached out to people across 400 districts to give out loans. In today's post we take a quick walk down memory lane to see the issues with loan melas historically and dig into the reason they are in the news now and the potential implications of the same.

Loan melas, which began as far back as the 1970s did not see a lot of success, perceived as something that weakened the lending process and tainted the credit culture due to the diluted diligence conducted. There is reason for cheer however looking at the improvements we have made over the years. Processes now are a lot more standardized, technology is a lot more advanced (though it still has a long way to go), and our institutions now have multiple decades of experience working in the space with the combined knowledge of banks, NBFCs and microfinance organizations. In that light the weakening credit culture argument seems a lot less valid today, than it did back then.

The melas however have been in the news for a different reason this time around. As economic indices across the board go for a toss, the government has been desperately trying to project numbers that signal a better or improving environment. In an attempt to show revival in credit growth and improving sentiment, the government cited 4.91tn of lending in the last two months (2.52 Oct, 2.39 Nov). The RBI data however seems to indicate that this number could be off, and off by quite a bit at that. 4.3tr to be exact.

Before we go further it helps to quickly look at a few differences in the reporting of the two. Firstly, There is a slight difference in period; The RBI collects data every alternate Friday, so the RBI collection period is from 27th Sep to 22nd Nov. The RBI also reports net disbursements: i.e. Loans issued net of loan repayments. That being said the difference in the numbers from the two sources is still extremely significant and definitely needs to be reconciled.

In an environment where the government has been increasingly blamed of either hiding or delaying data, the extent of this discrepancy is striking and could materially affect investor confidence in the country. Our neighbour to the north, China, has been accused of similar number fudging in the past, and with time that has severely diluted the value of the numbers coming out of government sources in the country. India, on the back of its extremely stellar and independent organizations, had managed to avoid that fate atleast on a sovereign level. And given the extent of external investments we would need to propel us into the next orbit of growth, we should work hard to keep it that way.

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Zapp 5: (Day's 5 top stories in 3 lines or less)

1. Sensex jumps 428 points: Continuing a 3 day rally the Sensex jumped 400+ points on the back of reduced trade tensions and a strong vote for Boris Johnson.

2. FM begins pre budget consultation exercise : Starting today FM Nirmala Sitharaman will be meeting industry bodies, farmer organizations as well as startups and capital markets players.

3. The perfect storm for FMCG: Falling real rural wages, declining savings, liquidity pressure in channels, and weakening consumer sentiment create the perfect storm for FMCG in India.

4. EaseMyTrip files for IPO: The online travel booking portal filed papers with SEBI for a 510cr IPO. The founders will be selling shares worth 255cr each. (Detailed post coming soon)

5. Boris Johnson led conservative party secures decisive win: The win implies the country is almost certain to leave the EU early next year. This has also been the most decisive win for the conservatives in nearly three decades.