The non-banking finance firms couldn't manage this high loan growth leading to defaults by some of the large entities triggering slowdown in the economy eventually
An automobile factory in Chennai. Representation pic/AFP
New Delhi: Government think tank Niti Aayog on Thursday made a case for extraordinary steps to deal with the unprecedented stress in the financial sector which has resulted in an economic slowdown in the country.
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The Centre needs to take steps that eliminate apprehension from the minds of private sector players and encourage them to step up investments, Niti Aayog vice chairman Rajiv Kumar said.
He also said private investments will drive India out of the middle income trap. Terming the stress in the financial sector as unprecedented, he said nobody had faced this sort of situation in the past 70 years when entire financial system was under threat.
Rajiv Kumar, Niti Aayog vice chairman
"Nobody is trusting anybody else... within the private sector nobody is ready to lend, everyone is sitting on cash...you may have to take steps which are extraordinary," he said.
He said some of the steps were aleady announced in the Budget to address stress in financial sector and give a push to economic growth which hit a 5-year low of 6.8 per cent in 2018-19. Explaining how stress has led to a slowdown in the economy, he said the entire episode started with indiscriminate lending during 2009-14 leading to rise in non-performing assets after 2014.
Rising NPAs reduced the ability of banks to do fresh lending, he said, adding the space was occupied by the shadow banks with credit growth of 25 per cent. The non-banking finance firms couldn't manage this high loan growth leading to defaults by some of the large entities triggering slowdown in the economy eventually.
"The whole nature of the game has changed after demonetisation, the Goods and Services Tax and the Insolvency and Bankruptcy Code. The earlier period where you had 35 per cent cash sloshing around, it has become much less now. All of this put together it is a fairly complex situation. There is no easy answer," he said.
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