Government think tank NITI Aayog on Thursday described the current stress in the financial sector as “unprecedented in the last 70 years”, saying nobody is trusting anyone else in the sector. It made a case for extraordinary steps to deal with the crisis that has resulted in an economic slowdown.
NITI Aayog Vice-Chairman Rajiv Kumar also said there was no business of the government to hold back payments to companies.
It is being sorted out, he said at an event in New Delhi on Thursday.
“Nobody is trusting anybody else... within the private sector nobody is ready to lend, everyone is sitting on cash... you may have to take steps that are extraordinary,” Kumar said.
He said the government needed to take steps, which eliminate apprehension from the minds of private sector players and encourage them to step up investments.
He also said private investments will drive India out of the middle income trap.
Elaborating further, Kumar said some of the steps have already been announced in the Union Budget to address stress in the financial sector and give a push to economic growth which hit a five-year low of 6.8 per cent in 2018-19.
Explaining how stress in the financial sector led to a slowdown in the economy, the NITI Aayog vice-chairman said the entire episode started with indiscriminate lending during 2009-14, leading to an increase in non-performing assets (NPAs) after 2014.
Rising NPAs reduced the ability of banks to do fresh lending, he said, adding the space was occupied by shadow banks with a credit growth of 25 per cent.
The non-banking finance companies (NBFCs) could not manage this high loan growth leading to defaults by some of the large entities triggering slowdown in the economy eventually.
“The whole nature of the game has changed after demonetisation, the goods and services tax and the Insolvency and Bankruptcy Code. Earlier, you had 35 per cent cash sloshing around, while it has now become much less. All these put together, it is a fairly complex situation. There is no easy answer,” he said.