Faulty credit policy

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The central government does not appear to be serious in tackling the financial crises facing the country in the next few years despite the fact that the previous experiment has miserably failed on account of demonetization and Goods and Services Tax (GST) implementation in the country. It is unfortunate that the suggestions made by financial experts in the past four years have been debunked by the present dispensation for the reasons best known to them. The financial health of the country has been well enumerated by the former and present RBI governors in time keeping in view the policies formulated by the present rulers. But the rulers have refused to adhere to the suggestions of the financial experts resulting in financial crises in the country wherein the common masses have suffered the most for no fault of theirs. The demonetization announced by the government almost two years back has failed to bring back the black money from abroad and within the country. In fact, the measure of the centre made rich people richer and the poor further poorer besides deceiving the common masses on this slogan of bringing back the black money stashed away in foreign banks. It is a matter of serious concern that the government of the day refuses to listen and learn from the past experiences on the issue of financial health of the country. It is a note of caution that former RBI Governor Raghuram Rajan’s suggestions on the financial crisis that could be building up needs to be taken in all seriousness. In his note to Parliament’s Estimates Committee on bank non-performing assets (NPAs), Raghuram Rajan had flagged three major sources of potential trouble: Mudra credit, which is basically small-ticket loans granted to micro and small enterprises; lending to farmers through Kisan Credit Cards; and contingent liabilities under the Credit Guarantee Scheme for MSMEs, run by the Small Industries Development Bank of India. The disbursement under Mudra loans alone is Rs 6.37 lakh crore, which is over 7 percent of the total outstanding bank credit. These loans have been sanctioned under the Pradhan Mantri Mudra Yojana, which aims to ‘fund the unfunded’, and is a signature scheme of the NDA government. Given that these are small loans up to Rs 10 lakh each, with the borrowers mostly from the informal sector, banks have to monitor them very closely. It is debatable whether banks have the resources and manpower to do this when they are chasing the bigger borrowers for business and, increasingly now a days, recoveries. The risk is that these small-ticket loans will drop under the radar and build into a large credit issue in due course of time. The same logic holds true for crop loans made through Kisan Credit Cards that too in the selected areas of the government. The former RBI Governor’s advice on loan waivers has been made in the past not only by him but others also. But, it is unfortunate that the political class has chosen to turn a deaf ear to this advice, vitiating the credit culture and creating a moral hazard where farmer-borrowers assume that their loans will invariably be waived off. This assumption is mainly for the reasons that the previous governments have done so for their own political benefits. The former RBI Governor has strongly defended the RBI against criticism, often unfair, over its policies on NPA recognition and resolution. Raghuram Rajan has rightly termed as ‘ludicrous’ the allegations that the economy slowed down because of the RBI’s policies. Recognition is the first step in a clean-up, and unless banks are cleaned of their non-performing assets and loans, they cannot make fresh loans. The central government should also take note of some forward-looking statements that Raghuram Rajan has made on the governance of banks. Among his suggestions to avert a recurrence of the current mess are, professionalising bank boards with appointments done by an independent Banks Board Bureau; inducting talent from outside banks to make up for the deficit within, revising compensation structures to attract the best talent, and ensuring that banks are not left without a leader at the top. It is a comment on the state of our polity that despite the important issues that Raghuram Rajan raised, political parties have chosen to pick only the points that are convenient to them – about the period when these bad loans were made and the inaction over a list of high-profile fraud cases highlighted by him.