Why There Is No Financial System to Protect Common Man's Savings, Asks Deepak Parekh
While we have regular loan waivers and corporate loan write-offs, why is no there financial system to protect the common man's savings, asks Deepak Parekh, chairman of Housing Development Finance Corp (HDFC).
"To my mind, there is no greater cardinal sin in finance than the misuse of the common man's hard earned savings. It seems brutally unfair that we have allowed a system of loan waivers and write offs every now and again, but yet we do not have robust enough financial systems to protect the honest, common man's savings. And mind you, this is not just a problem in India, this is a financial problem the world over," Mr Parekh said while delivering his keynote address on "Path to $5 trillion: Role of the Financial Sector" at the Centre for Financial Services.
Without taking the name of scam-hit Punjab & Maharashtra Cooperative Bank (PMC Bank), Mr Parekh said, trust and confidence are the backbone of any financial system and it takes years to build a reputation and seconds to destroy it.
According to the HDFC chairman, India needs more savers in the country if credit has to grow. "The savings rate at 30% of gross domestic product (GDP) has been showing a declining trend over the past decade. Household savings is important for the Indian economy and that is why there is likely to be a threshold beyond which lowering interest rates becomes difficult. Indian savers prefer assured returns which is why fixed deposits continue to remain the preferred choice of savings," he said.
Investment and insurance play an important role in the financial life, especially for youngsters, Mr Parekh said, adding, "We have got to get younger people insured much earlier in life. We have got to get more youngsters to become patient, long-term savers and investors in equities and mutual funds. And I am optimistic enough to believe we are moving in the right direction. In 2014, assets under management of mutual funds hit the Rs10 trillion mark and in just three years, in 2017, it doubled to Rs20 trillion and as at August 2019 it stood at Rs25 trillion. About 57% of industry investor base are retail investors."
In unusual times, as we are in right now, the HDFC chairman feels that fiscal and monetary policy tools need to be accelerated in a timely, yet prudent manner. He said, "There is consensus that a slight increase in the fiscal deficit target can be accommodated as long as it stimulates growth. Efforts are being made to ensure that lower fiscal revenues on account of stimulus measures, lower corporate tax rates and goods and services tax (GST) collection shortfalls could be compensated by more aggressive disinvestments plans and perhaps increased payouts by the Reserve Bank of India (RBI)."
To ensure adequate liquidity in the system during this year alone, the RBI has reduced policy rates by 135 basis points (bps) and is trying for effective monetary policy transmission.
However, the crux of the problem with the financial sector, according to Mr Parekh, is that the flow of credit to the commercial sector is still clogged. "During the first six months of the current financial year, the total flow of resources to the commercial sector from banks and non-bank sources was only Rs0.9 trillion compared to Rs7.4 trillion in the previous year - that's a drop of 88%. This clearly reflects the risk averseness in the system."
"Since the time the asset quality review (AQR) began in 2015, banks have scaled back lending. Till last year, the commercial sector relied heavily on non-bank funding sources as a substitute. When non-bank funding sources got choked, it threw the financial system into a tizzy. The underlying point is that the Indian economy needs both, banks and non-bank sources to meet its funding needs. And the key hurdle now is getting over the trust deficit," he added.
According to Mr Parekh, several companies are still unwinding their overleveraged positions. He says, "Leverage is a double-edged sword. In good times, it helps to scale up and amplifies profits, but in a downturn, over leverage has seen the downfall of many. A simple rule is that capital must always be raised from a position of strength and not when one's back is up against the wall."
Talking about India becoming a $5 trillion economy by 2014, the HDFC chief feels the question is not whether we can do it, but how soon we can attain this goal. He said, "Today, India is a US$ 2.8 trillion economy. It took India 60 years post-independence to become a $1 trillion dollar economy in 2007. It took another seven years to become a $2 trillion dollar economy in 2015. The next trillion will be added in just five years, when India is likely to be a $3 trillion economy in 2020. The key point is that each trillion is being added in a shorter time span. If India's economy is not $5 trillion by 2024 as envisaged by the government, it will certainly achieve it a year later."
Mr Parekh feels that India critically needs two things from the world, capital and oil. He says, about 30% of bonds issued by governments and companies globally are trading at negative yields, which is about 17 trillion. "Doesn't this make it a fine time for India to seize the opportunity to attract much more global capital? Investors are craving for higher yields and India has demonstrated that it can deliver attractive returns. For example, despite all the negative headlines that the real estate sector has been receiving, few recognise that in the first six months of this year, investors have pumped in close to $4 billion across commercial office premises, retail and warehousing. Sovereign funds, pension funds, private equity investors are seeing the long-term growth opportunities in the expansion of India's services sector, particularly information technology (IT) and IT enabled services and e-commerce, which in turn needs warehousing and logistics assets," he added.
The other key reason, according to the HDFC chairman on why India's macro parameters are currently fairly strong is that oil prices have remained fairly moderate. Fortunately, he said, "We have not faced shocks of oil above $100 per barrel since 2014. Since India imports 80% of its crude requirements, higher oil prices play havoc with inflation, the fiscal, the current account deficit (CAD) and the currency."