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Loan melas have been recipe for NPA disaster for PSBs starting with Rajiv Gandhi era; Narendra Modi govt should learn from past

Dinesh Unnikrishnan

As they say, those who cannot remember the past are condemned to repeat it. In the mid-80s, during the Congress rule under the then Prime Minister, Rajiv Gandhi, loan melas of significant size were launched for small entrepreneurs and retail borrowers. Gandhi's junior finance minister Janardhan Poojary spearheaded the campaign by tutoring state-run banks on when and how to go about the plan.

Since this was primarily a political decision and the Reserve Bank of India (RBI) had little role to play in it, banks were under tremendous pressure to make the scheme a big success, else face the wrath of the government. In this hurry, prudential norms on collateral requirement and creditworthiness of the borrower were given a convenient miss. Loans were given away generously.

As it would happen in the case of any such schemes, much of these loans were not paid back to banks. In banking terms, these loans became non-performance assets (NPAs). In the subsequent years, several banks saw their NPA percentage levels to total loans shooting to high double digits. It took a good one-and-half decade for these banks to salvage these loan melas-triggered bad loans and clean up their books to a healthy state.

Three decades later, the second National Democratic Alliance (NDA) government under Prime Minister Narendra Modi is about to repeat the same mistake. On Thursday, Modi's Finance Minister Nirmala Sitharaman said government banks will organise credit "Shamiana meetings" in 400 districts starting 3 October to give loans to non-banking finance companies (NBFCs) and retail borrowers such as homebuyers and farmers. These are nothing but a repeat of the loan melas.

"Public sector banks (PSBs) will focus on giving loans to the 'RAM' category €" retail, agriculture and Micro, Small and Medium Enterprises (MSMEs)," Sitharaman said at a press conference after meeting the PSB heads, adding the intent is to ensure maximum loan disbursal during the festive season. This announcement must be a Déjà vu moment for many senior and retired bank officials who would have participated in the 80's loan melas and seen its consequences.

India's PSBs are just emerging out of a major NPA trap after a painful bad loan clean-up process initiated by Modi's first government and under the aegis of the RBI in 2015.

Several years of accumulated bad loans on account of careless lending during United Progressive Alliance (UPA) I and II and great amount of political populism had taken the gross NPA figure to close to Rs 10 lakh crore. Most of the bad loans were hidden below the carpets of PSBs and were dug out only after mandatory disclosure rules came into effect. The public sector undertaking (PSU) banks, at this stage, look much better and cleaner on account of this exercise. But, what Sitharaman proposing will likely kick off another round of NPA cycle.

Government's idea is to push credit to the productive segments to give a leg-up to the economy, that's understandable. But, for this you don't need a loan melas; even now banks have kept their doors open for all types of borrowers under various schemes.

Besides, there are also priority sector lending norms that require banks to compulsorily lend to farmers and small entrepreneurs based on an annual target. Also, in the run-up to the 2014 Lok Sabha polls and the years after that, many state governments, including large states like Maharashtra and Uttar Pradesh, had implemented massive loan waivers the burden of which again fell upon the state-run banks. The impact of these politically-motivated lending programmes is yet to reflect on the balance sheets of the PSBs. On top of this, if the loan melas are imposed on banks, it will lead to a bigger NPA disaster.

The problem with the loan melas is this. The state-run bankers who would want to be in the good books of government will be under tremendous pressure to show these melas a success.

Already, bankers have learned their lessons from huge NPAs from the MSME, agri loans and had curtailed lending as part of de-leveraging exercise. But, here they wouldn't have much choice but to push loans further.

Ideally, loans to entrepreneurs must be originated based on viable business plan and creditworthiness of the borrower after a thorough assessment. But, during the loan melas and loan waivers, the past experience shows, most of these golden rules are conveniently forgotten. The priority typically will be to meet certain targets so that the originator of the idea€"the government€"can show the scheme as a success. Herein lies the danger for the banking sector.

At a time when economic activity has slowed to a trickle, it is a high-risk idea to push bank credit to vulnerable sectors and potentially weaken the banking system further. Instead, the government can directly fund small entrepreneurs on a merit-based approach and assist farmers with non-fund support through nodal agencies. State-run banks don't always need to be the vehicles of government-sponsored schemes.

Politically-sponsored loan melas and waivers tell us why it is even more important to free PSU banks from government's majority ownership. Till the time these banks are under the mercy of the government for survival capital, these banks will have no business autonomy to take or to not take a certain loan decision. This freedom is extremely critical to strengthen these institutions. So far what the government has done is only to club small PSBs to make relatively bigger ones that are still under government control.

Bottom line is this: This is the time when PSBs are struggling to get back to financial health and are busy preparing for the grand merger exercise government recently announced. At this juncture, the government shouldn't force these banks to repeat the mistakes of the past.

Also See: No stressed MSME loan can be declared NPA till March 2020; govt asks banks to hold loan melas in 400 districts from 3 Oct

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