The Fall of Trust

Somewhere in financial history, the word ‘trust’ got replaced by the word ‘credit’ which divided the economic chronology into After Credit and Before Credit. Even though credit was present from before agrarian economies, it was used in an organised manner by Europeans from the 15th century which in turn fueled their scientific as well as political conquests.

Credit which is trust in future boomed when the trust was kept or got fulfilled by advancement in economies, which in return again fueled credit growth. This cyclical growth excited man and he made the cycle circle faster at each turn by lending, spending and printing too much. Obviously this made the Europeans champions of the world and hence the first to go bankrupt.

In the 21st century their credit cycle broke all of a sudden, and they found themselves staring at negative returns on the credit facilities. This meant the number of trusted parties who can avail credit had declined, resulting in the need to shell out in order to find parties willing to accept credit. This happens because the trust factor in future has declined as the number of defaulting accounts rapidly balloon and even lead to sovereign countries defaulting on credit.

Italy was in crown position of having world’s highest ratio of bad debts. This crown position was challenged by a country in South East Asia where everything happens prematurely. That’s India. Even though India saw organised credit surge and became the economy’s backbone very late only in the 20th century, we are staring at huge bad debts which is around 9.5% of the total advances, where in Italy the bad debts are at 8.5% currently down from 17% in 2015. We are facing this high ratio of broken promises for last few years and we planned many things.

Now in 2019, the bad debts have changed their status from the ‘result’ to ‘cause’. We were talking about why it happened for last few years but now we are discussing what it will result from now on. The CEO of NITI Ayog, Amitabh Kant said that trust is missing in the economy which, as we’ve seen really means credit is missing from the economy. So where did the trust go? Since 2005, we saw boom years for trust where we saw credit was flowing seamlessly and investments were soaring. We added capacity in infrastructure like power plants, airports, ports and roadways. We invested heavily in industries and we created immense capacities. This was all made possible by the basic emotion of credit or trust in tomorrow, that tomorrow will be better than today. Indians were also sure that our more than enough population itself will provide the required demand and hence the cycle of trust will be safe. Alas it wasn’t.

The lack of reforms in the Banking and Finance Industry and the policy paralysis in the second term for the UPA government started the cracks in our cycle of trust.

In the first half of the 2010s, PSB asset books were ripe with more than 10% NPA’s, this led to a fall in their lending and their share in lending was taken over by NBFCs which got their boom years from the beginning of this decade. This boom bank rolled the initial years of NDA govt where no one knows actual growth rates. Introduction of fresh initiatives by NDA such as IBC brought fresh life to the trust in future. But just like as GST, the IBC was also introduced half baked, and as of now, number of cases pending more than 270 days which was the defined deadline to be decisioned is 400. It became another Judicial system of India.

Then came the ILFS balloon burst. This took away the single engine on which the economy was running – the NBFCs. Funds became costlier or rare for the NBFCs and hence for the end users. Now we are celebrating one year of NBFC crisis and economy shows the effects. As nobody is there to fund, the demand worsened and the auto sector’s fall was first omens of impending doom. All sectors started cost cutting and the already worse unemployment hit another spike which again affected aggregate demand. This eroded the trust in tomorrow. Only trust eroded, not the money with banks. As trust in the economy eroded people are less likely to invest in the market and hence this money will go to less risky fixed deposits.

Obviously for a less trusted tomorrow, credit is not favorable and hence needs the rate cuts to encourage people who can afford a credit at this time to come on board.

Making all this worse is the attitude of the government of the day. The government is either ignorant, lazy or just in plain denial about the crisis. The actions of the government are nothing less than blunders. Perhaps that will make the cut to the second episode of this series.