More risk of loss than benefit to banks through organizing loan fairs

- The results of generosity in providing credit to various components of the economy remain disappointing

In a recent meeting with bankers, Finance Minister Nirmala Sitaram was instructed to once again organize a loan fair as part of increasing lending in the country. Earlier, a loan fair was organized in 2012 to increase lending. The fair was followed by an increase in non-performing assets (NPAs) in the banking sector. Whether the increase in NPAs was due to the loan fair or for various other reasons is a matter of debate. There were reports of loans of more than Rs 20,000 crore being released at the 2012 loan fair. As part of next month's loan fair, banks will set up special campuses in about 200 districts across the country and reach out to under-stressed micro, small and medium enterprises (MSMEs). It would not be wrong to say that such campuses do more harm to the banks than benefit the MSAME sector. Apart from MSMEs, banks will also pay special attention to increasing agricultural and retail loans.

In terms of asset quality, the country's banks have not yet come out of the NPA problem. This loan fair will not create an unfavorable situation for them, as banks are also under pressure to disburse loans through loan fairs and banks are slow to disburse loans. Which ultimately increases their NPA. A recent report by the Reserve Bank of India's internal working group has warned of serious consequences for waiver of agricultural loans. Agricultural loan waivers have a negative impact on the balance sheets of most banks. The reason behind the current slowdown in lending in the country is the economic slowdown and not the indifference of banks in providing credit. Lending growth in banks has been around 6 per cent. Speaking of the MSME sector, the debt burden is increasing more than the growth in their production.

At a time when the overall demand situation in the country is weak, increasing credit flows to various components of the economy is expected to boost consumption and investment. The idea of ​​approaching them to lend to various components of the economy is worthwhile, but the results have always been disappointing. Due to the high level of NPAs in the country's banks, it is the turn of the government to inject capital into the banks. In the last seven years, the country's public sector banks have had to write off loans worth an estimated Rs 8 trillion. During this period, the number of write-offs has doubled compared to the capital invested in banks by the government. This creates an irreversible condition.

Previous governments have been interfering in the operations of banks and the country's banks have been repeatedly accused by the current government of being weak due to their phone banking practices. The present government has claimed many times before coming to power that its government will not interfere in the affairs of the banks, but in reality the picture is looking somewhat different.

Long-term resolution of NPAs also requires that public sector banks have sufficient independence in their operations. With the move to remove government control over some of the public sector banks, the intervention of bureaucrats and politicians in the remaining banks is now coming to an end. Autonomy for banks does not mean that they should not be overseen. Not a whip but a bridle is required.

In addition to strengthening the banks financially, the Bankruptcy Code has also been implemented to recover money from defaulters, especially willful defaulters, but the action taken under this Act has not yielded the expected results. Not only that, the economic downturn due to Corona is likely to lead to massive defaults in banks. A recent report estimates that banks' gross NPAs will cross Rs 10 lakh crore by the end of the current financial year.

It is not that our banks are run on people's tax money and the people who run the banks are not capable themselves. India is the only democracy in the world where the government itself runs the bank on a commercial basis. But the lack of a professional approach to its management has often led to public money slipping into the hands of beneficiaries. For our politicians, government banks are a scapegoat which they first squeeze out and when they get sick, they go out to cure it with the money of the common people. Perhaps this is the reason why no government so far has thought of reducing its dominance over banks. Given the privatization proposals of the banks, this situation is likely to change. We expect the government to be successful in maintaining cash flow in the country's banks after Covid-16 and to allow banks to operate without the intervention of political parties in a way that reduces the need for recapitalization in the coming years.