Phone banking, again

Bad ideas from India's socialist past should be avoided

Just after coming to power in 2014, the National Democratic Alliance (NDA) government had said that “phone calls from Delhi” would stop as far as public sector banks (PSB) were concerned. The NDA-II government seems to have forgotten that promise, as is evident from its announcement last week that PSBs would hold “Shamiana meetings” in 400 districts of the country so that smaller businesses and retail borrowers can access loans from banks and partner non-banking financial companies (NBFCs). Easy availability of credit during the festive season, the government believes, would have a multiplier effect and push up demand throughout the economy. The meetings — which are, to all intents and purposes, retitled “loan melas” from the socialist era — will begin shortly, and all the 400 districts are supposed to be covered by October 15. This, together with the announcement that banks would not declare any small enterprise’s loan stressed till March 2020, makes it quite clear that the government is willing to suspend normal procedure to push liquidity into the system. It is not just enterprise loans that are to be incentivised — even home and vehicle loans are hoped to be stimulated.

While measures are indeed needed to restore credit availability to the most vulnerable sections of the economy, this is certainly not the way to go about it. It is as if no lessons have been learned from the past. Certainly, as this newspaper has reported, PSBs warned the finance ministry of the misguided nature of the proposal, pointing out that demand was as much of a constraint as supply. If indeed it is only a “perception” of a lack of liquidity that the finance ministry wishes to dispel, it should be asked whether it is willing to precipitate a fresh non-performing asset to get rid of a “perception”. The PSBs have once again been revealed as little more than conduits for government policy, at the risk of their own health and of systemic stability. This is the exact opposite of the independence that PSBs need, and which is essential for sustainable growth in the medium term. 

There is ample evidence of the danger that such loan melas pose on multiple levels to the financial system and the broader economy. Together with the forbearance demanded by the finance ministry of the PSBs, they will lead to the build-up of non-performing assets. Worse, this combination of policies will undermine the fragile credit culture that was just beginning to be built up. Credit that is directed, thanks to government diktat rather than the reasoned decisions of properly incentivised bankers, leads to a structural misallocation of resources across the broader economy. India is capital-scarce, and loan melas are among the worst ways of allocating capital if it is to be used productively. If the desire is to increase welfare and consumption, direct benefit transfers are a far better route. If the government, in fact, wishes to stimulate investment and productive capital, increasing bank independence, cleaning up their balance sheets, and resuscitating the NBFCs are the way to go about it. This socialist half-way house is among the worst.