EXCLUSIVE: Ajay Piramal believes that if banks won't lend to long-term projects, India will need to revive the likes of IDBI and IFCI

EXCLUSIVE: Ajay Piramal believes that if banks won't lend to long-term projects, India will need to revive the likes of IDBI and IFCI
Indian billionaire and the chairman of the Piramal Group Ajay Piramal BCCL
  • Indian billionaire and industrialist Ajay Piramal believes that the country may need to bring back lenders like IDBI and IFCI if banks don’t lend for long term projects.
  • According to him, credit growth needs to outpace economic growth for there to be recovery.
  • “Funds available with banks are more than what they’re giving out. The credit to deposit ratio is going in the wrong direction,” Piramal explained at the Business Insider Trends Festival 2020.
Banks are hesitant to give out loans, and borrowers are worried about the existing payments they have to make. But, without credit, it's almost impossible for an economy to grow.

Indian billionaire and industrialist Ajay Piramal believes that it may be time to bring back the likes of IDBI and IFCI — development banks offering funds for long-term projects — to break the stalemate and get growth on the cards again.

“It (the economy) cannot grow unless credit grows. If you want economic growth of 10%, then credit growth must be at least 15%. If credit growth slows down, GDP will also come down,” he said at the Business Insider Global Trends Festival 2020.

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EXCLUSIVE: Ajay Piramal believes that if banks won't lend to long-term projects, India will need to revive the likes of IDBI and IFCI
India's credit growthRBI/BI India

Reserve Bank of India ( RBI) data shows that credit growth was on a downward trajectory well before COVID-19. Not only was it falling over the past two years, but far from the days of double-digit growth seen in 2009 at over 27%.

CRISIL forecast that bank credit growth would bottom out and rise by 8% to 9% in the current fiscal. But, that was before the pandemic struck. Now, it’s more likely to nosedive to create a multi-decade low.

The current predicament is that credit is necessary for economic growth. Without it, there will be stagnation, as seen in the example of the Romanian economy — which eventually led to a loss of trust in the local currency, no new projects, and no multiplier creating jobs.
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When credit grows, consumers can borrow and spend more while enterprises can borrow and invest more. The simultaneous rise of consumption and investment creates jobs and leads to both income and profit growth.

Creating development banks for long-term funds
The lack of credit growth in the economy is two-fold. Banks are risk-averse, and so are the borrowers. In the absence of options, even though banks have the funds, they’ve been parking that money with the RBI rather than doling it out to the masses.

This despite the fact that the RBI has drastically reduced the reverse repo rate — the rate at which banks can earn interest if they deposit their funds with the central bank. In May, banks made $3.1 billion this way.
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“Funds available with banks are more than what they’re giving out. The credit to deposit ratio is going in the wrong direction,” Piramal explained.

For funds to start following again, the reins need to be loosened up a little. According to rating agency Moody’s, corporate loans are likely to be more resilient to the economic downturn than retail or SME credit. But, corporates need large amounts for long term endeavours.

“There’s no long term finance available in India anymore. Most of the banks are not lending long term,” said Piramal. “We’ll have to create this system where long-term funds are available; otherwise you’ll not have projects.”
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The irony, however, is that the country has spent decades divesting out of those companies. IDBI was originally a subsidiary of RBI when it was established in 1964, and, just last year, it was reclassified as a private sector bank.

However, India may not have a choice if it wants the economy to grow, according to Piramal.

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