The Financial Express

A bank loan that tells a tale of woes

A bank loan that tells a tale of woes

What an irony! Banks are finding it difficult to woo clients for their consumer loan that is now offered at very attractive interest rates.

The demand for this particular type of loan plummeted to the lowest ever level in 2020 and the trend is continuing.

The situation was just the opposite in the years preceding the pandemic when the average interest rate of the consumer loan was almost twice the present rate.

According to a report published in a vernacular business daily, the rate of growth of consumer loans in 2020 dropped to 6.0 per cent when the lending rate for the same came down to 7.0-8.0 per cent. In 2017 the growth peaked at 16 per cent with banks charging as high as 16-17 per cent interest.

The pandemic has been responsible for the drastic fall in the demand for a consumer loan that covers the use of credit cards and purchase of cars and flats etc., and personal loans.

The pandemic, undoubtedly, has changed the economic landscape all over. If not the rich, the invasion of the deadly pathogen has also hit hard the middle-class people, who remain the key clients of the consumer loan. Many members of this class either have lost jobs or faced salary cuts. Income from other sources, if there is any, has also dried up or dwindled to a large extent. 

Not only banks, the manufacturers and sellers of consumer goods, including electronics, electrical appliances, leather goods, apparel brands, are also deeply affected. The profitability of most of them has gone down and some are even incurring losses.

It is an uncertain time. None knows for sure when normalcy would return to everyday life. Like all others, middle-class people are also gripped by fear and worries. So, they have been downsizing their non-essential expenditures as much as possible and trying to live on the bare minimum.

The banks are also responsible for the decline in the demand for consumer loans. They have reduced the interest rates for all types of loans under the instruction of the central bank. The truth is that the government desired the reduced lending rates to help cut the cost of doing business and boost private investment. All this has been done at the cost of depositors who are now having a negative return on their money kept with the banks. How far the lending rate cut has fulfilled the objectives remains a matter of scrutiny.

The banks have always been choosy in selecting clients for consumer loans although it fetches them higher profit. The banks are now more selective than before because the pandemic has severely affected the financial ability of their target clients. So, the dwindling interest among the main target clients coupled with the banks' cautious approach has been creating a negative effect on the distribution of consumer loans. The situation may remain so until life returns to normal in the event of a notable improvement in Covid situation. It is difficult to say when that would happen. But much would depend on the speed and coverage of the ongoing vaccination programme.

A few people in power may claim otherwise, but the fact remains that the pandemic has been giving rise to economic woes of serious nature across the board. The poor, the middle class and the rich---all are affected. But the capacity to withstand the onslaught varies widely. The rich, of course, can easily mend the damage. The middle-class people have to make adjustments and put on hold some non-essential expenditure during one of the most hard times in human history. The story is different as far as the poor are concerned during this period of unprecedented economic hardship. They are now unable to sell their labour and earn a livelihood. There is none to help them either. During the first wave of the pandemic, some assistance came along from the government and many other private sources. But that has largely dried up during the ongoing second wave.

The middle-class that represents over one-fifth of the population plays an important role in the economy. They spend a sizeable amount of money on essentials and some non-essential items. This buoys up the economy. When they cut on their consumption for one reason or the other, the economy suffers. The producers of non-essential goods, including electric and electronic goods, high-end apparel, leather goods etc., are also forced to slow down their production. This hurts them and the government as well. The latter gets lesser revenues in the form of value-added tax and corporate tax. Some factories resort to downsizing their workforce or suspending production temporarily. This again aggravates the poor workers' condition. 


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