From: 'Soumya Ghosh'
Date: Wed, Dec 16, 2020 at 7:48 AM
Subject: Fwd: Ecowrap - FY21GDP DEGROWTH AT 7.4%, Q3FY21 AT 0.1%: BUT TIME TO REDEFINE RETAIL SCORING MODELS?
To:
Sent: Tuesday, December 15, 2020 11:38:54 PM
To: Soumya Ghosh <soumya.ghosh@sbi.co.in>
Subject: Ecowrap - FY21GDP DEGROWTH AT 7.4%, Q3FY21 AT 0.1%: BUT TIME TO REDEFINE RETAIL SCORING MODELS?
Madam/Sir,
We are glad to enclose a copy of SBI Ecowrap titled "FY21GDP DEGROWTH AT 7.4%, Q3FY21 AT 0.1%: BUT TIME TO REDEFINE RETAIL SCORING MODELS?" for your perusal.
Based on better than expected recovery, our FY21 GDP estimate is now at –7.4% (earlier –10.9%). Our revised GDP estimates are based on SBI 'Nowcasting Model' with 41 high frequency indicators associated with industry activity, service activity, and global economy. We have used the dynamic factor model to estimate the common or representative or latent factor of all the 41 high frequency indicators from Q4 of 2012 to Q4 of 2020 (till Nov actual data is used while trend is used for Dec). Based on this model the forecasted GDP growth for Q3 would be around 0.1% (with downward bias). Additionally, out of the 41 high frequency leading indicators, 58% are showing acceleration in Q3. Positive momentum of various economic indicators including RTO transactions, revenue collection at RTO, revenue earning of freight traffic, weekly food arrival, petrol and diesel consumption continued in November. Even our business activity index which is based on high frequency indicators show improving momentum after a modest decline in the week of Diwali.
Further, the FY22 GDP growth would be at 11% primarily due to base effect. However, all projections are conditional on the absence of another wave of infections. We believe that it will take almost 7-quarters from Q4 FY21 (and 5-quarters from now) to reach the pre-pandemic level in nominal terms and there will be a permanent output loss of around 9% of GDP.
Interestingly, even as growth outlook has improved, the decline in Government expenditure has been quite significant to Rs 3.62 lakh crore in Q2 FY21 from Rs 4.86 lakh crore in Q1 FY21. The revenue and capital expenditure both declined in Q2 compared to Q1, with larger decline witnessed in revenue expenditure (-19.5% QoQ compared to -12.1% QoQ in capital expenditure). Moreover, October data shows further decline in overall expenditure compared to September. We believe that a large part of fiscal expenditure by the Government has been indirect and are off balance sheet items. For example, the free food grains distribution to poor through PDS might be taken as off balance sheet adjustment with FCI.
This gives us hope that the Government might be able to spend in Q4 to resurrect growth further. We are also revising our fiscal deficit estimates for FY21 at 8% of GDP.
We also believe that the stress in lieu of the retail sector across banks is perhaps a tad overblown. As an example, when we look at the debit (recurring payments including EMI, insurance premium, etc) return % of National Automated Clearing House (NACH) it declined after peaking in Jun'20. However, it remains at elevated levels and also increased modestly in October to 32.3% compared to 31.7% in September. While it is true that the change in % return of total debits is modestly positively correlated with change in retail NPA ratio, but it works with a lag. Thus, we believe that we need to look at the trends for next couple of months before deciphering the quality of retail book.
However, there is one learning for retail credit scoring models of banks and credit bureaus. Between 2008 and 2020, various parts of Indian retail portfolio has faced crisis like conditions - more often associated with natural calamities than pure economic shocks. So clearly there is enough systemic data available with credit bureau and with large lenders where the behaviour of crisis susceptible borrowers can be studied. Each successive shock has higher economic fallout than the previous one. It creates a strong case for building capabilities of crisis susceptibilities of Individual borrowers. As such, Indian credit bureaus who have done an excellent job with supporting the decade long retail credit growth with their scores and data are possibly best placed to take the first steps towards creating individual's crisis susceptibility scores at a system wide level.
Warm Regards
Dr. Soumya Kanti Ghosh
Group Chief Economic Advisor
Economic Research Department
State Bank of India
Corporate Centre
Mumbai
Email: soumya.ghosh@sbi.co.in
Twitter: @kantisoumya
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