04 Oct 2019 19:30 IST

Of loans and other melas

In an economy beset by weak demand, raising rural incomes is key to kick-starting the consumption cycle

The week before last, the headlines and TV screens have been dominated by Prime Minister Narendra Modi’s ‘Howdy, Modi’ jamboree in Houston, US. In Texas, the Prime Minister not only basked in the adulation of almost 60,000 American Indians, he was joined on stage by none other than US President Donald Trump and an array of senior Republican and Democratic politicians.

Just before Modi departed for the US, Finance Minister Nirmala Sitharaman announced significant tax cuts for the corporate sector, the Modi 2.0’s first ‘big-bang’ reform. The tax cuts brought India’s corporate tax rates in sync with many major Asian economies.

After presenting a rather lacklustre Budget in early July, the Finance Minister has been under pressure to bring out a package to revive the economy, especially after the CSO came out with the 5 per cent growth print for the first quarter of the current fiscal.

The first announcement made by Sitharaman was that of the mega PSU bank merger. But just before she announced the corporate tax cuts, she made another important announcement regarding banks which got submerged in the din of ‘Howdy, Modi’.

Loans to the needy

The Finance Minister, at a press conference on September 18, urged public sector banks to conduct large loan gatherings under ‘shamianas’ across 400 districts to give out loans to the needy. Crucially, she added that no MSME unit will be classified as an NPA (non-performing asset) till March 31, 2020. NBFCs, whose financial stress is well documented by now, will partner with the PSU banks in these ‘loan melas’.

Alarmingly, she also urged banks to get five new credit customers for every existing customer they had. All these measures were ostensibly taken to  ensure liquidity for both business and individuals, in an effort to boost business investments and consumer spending.

Even as the announcements were unfolding on our TV screens, newsrooms across the country began to talk about another ‘loan mela’ in the offing.

The beginning of loan mela

The original loan mela played out in the early 1980s under Indira Gandhi’s regime. Senior Karnataka Congress leader and then Minister of State for Finance Janadhan Poojary’s name will indelibly be linked with the term 'loan mela'. It was he who first started giving out cheap loans to people across the spectrum of society to fulfill their credit needs. Needless to say, most people who took these loans had no intention of paying them back, so Indian bankings’ first ‘NPA’ crisis unfolded back in the late 1980s.

The second one was, of course, in the last decade, when the PSU banks were nudged by the political powers to lend big to the corporate sector, especially to companies in the infrastructure space. For long, the PSU banks did a good job of hiding these NPAs under ‘evergreening’ schemes, where bad loans were not shown on balance sheets but ‘rolled over’ instead.

It was during Raghuram Rajan’s stint as RBI Governor that the real extent of the rot in our banking system came out in the open. Rajan initiated a comprehensive ‘asset quality review’ of PSU banks and scrapped the various restructuring schemes such as CDR and SDR.

The ₹70,000-crore capital infusion into PSU banks by the Modi government 1.0 was barely sufficient to stem the tide.

But with Sitharaman’s latest missive to PSU banks to literally go after loan applicants in 400 districts has the very real danger of making the NPA mess even bigger. What’s more — it may even have the potential to undo whatever good the mega mergers of PSU banks are supposed to bring.

The economic calamity

The economy is in the grips of a very real crisis. Though the RBI has called it a cyclical crisis, there are very real signs of structural issues confronting the economy. The problem is not just one of weak investments but of a very serious slowdown in consumption.

Given the enormity of the issues on hand, conducting ‘loan melas’ across 400 districts will only compound the problems facing the banking sector, already groaning under a pile of bad loans.

For the economy to revive, it is crucial to kick-start the consumption cycle in rural India. As mentioned recently by several economists, including Ajit Ranade, Pronab Sen and Jayati Ghosh, raising rural incomes is key to reviving the weak demand scenario. The Finance Minister’s ‘big bang’ packages so far have focussed on the banking and corporate sectors, when it is the farm sector that is crying out for help.