Are we leading ourselves to recession?
After the big judgement day on 8th of November by our PM Modi to scrap the Rs. 500 and Rs.1000, we have taken a huge move towards curbing the black money. Where all the Indians are concerned on how to avoid the tax penalty or find the loop whole or be worried about standing in bank line.
What I understand by this move that its consequences might lead us to great depression in next 20 years. As of now where the banks have power which they could have not imagined through this move. We all Indians have deposited all the money which we had in the banks and ultimately the money has gone in the circulation of the economy.
So with the flush of cash in the system the largest bank in India, State bank of India on 17th of November announced a reduction in the lending rate as well as on the deposits. This particular move was seen in other banks as well. Initially there were different sources from where a person could get finance without going to the banks as they had little or no collateral securities or weren’t to educated too understand the mechanism of the banking system and even If I talk about business too there were different ‘parties’ though which the cycle of finance used to perish.
But now with demometization move, the banks will be the only major lending institutions where all the people have to come whether willingly or not, because the Black money lenders have been cut off as intermediary.
Now due to the excess money received from this movement, banks will relentlessly approve the loans and disbursing at lower rate and the people which are hit by the demonetization will be the first to grab the opportunity to compensate for their losses, but now with the cushion of the black money which was saved to provide them in their hard time has gone, so during the time of losses they will be the first to be bankrupt.
Then comes the brain child of PM Modi “THE MUDRA LOAN” which was launched on 8th of April 2015, a great initiative, though the advances has crossed Rs. 71,000 core (In January 2016) and as per the scheme it is intended to refinance collateral-free loans of up to Rs 10 lakh given by lending institutions to non-corporate small borrowers, for income-generating activities in the non-farm segment. Thus putting banks in tough position as MUDRA loans can easily slip to non-performing assets (NPA). Thus with such high number of advances there will be proportionately high percentage of provision for bad loans.
FACT -The SBI faces decline in profit upto 61% in previous financial year and have identified Rs.31,352 crore worth of risky loans and kept them on a “special watch”.
As per the last financial year closing 2016 all the 11 PSU banks had booked a total of 12,867 core loss which was mainly due to sudden increase in the percentage of bad loan provision.
With EMI’s being cheap or Credit Card interest rate reduced will encourage wasteful expenditure, now this in turn has two effects on the system firstly economy goes into an inflation and Secondly it will reach to a point where the individual won’t be In a capacity to return the money back leading to insolvency.
In a layman terms, It won’t be long where Indians will eventually start living like the “americans” i.e living off the credit as they have got used to the system and well the same pattern is seen in the youth of our country as of for now.
Now talking about the deposits, the interest on the deposits have also reduced as the effect of demonetization, this will create other major issue because INFLOW OF MONEY in banks will decline because as an investor they would not prefer a low interest yield and also it will have effect on foreign direct investment (FDI).
Pilling up of bad loans of Mudra, increased insolvency and reduced deposit the banking system will come to a halt and thereby crippling the economy and there you have a great depression. We Indians have been saved from the depression because of the INDIAN MENTALITY of savings which even in the bad times have saved the Indian banks time and time again. But with changing generations and systems we may lead ourselves to recession.
CA Final student and also pursuing Company Secretary.
For me its not writing about the trending topics its about righting what most people take it granted