A brilliant article by Prasenjit K Basu Sir on negative impact of loan waivers.
1. Reformist govts have had to cleanse mess in banking system in each of last three decades. In 1994, Narasimha Rao devised asset reconstruction framework to clean up banks,while NDA’s 2002 Securitisation Bill and 2016 Bankruptcy Code enabled banks to seize assets of defaulters
2. Nationalised banks’ corrupt lending to corporate cronies was at the centre of each of these banking crises. ‘Loan waivers’ have been a peculiar vote-buying innovation since the 1980s.
3 Its precursor was the ‘loan mela’ invented by Congress’ Janardhan Poojary in Karnataka in 1984, to counter Ramakrishna Hegde’s Janata Party govt.
4. V P Singh, having made his reputation through fiscal reform in his two-year as finance minister, decided that a mass loan waiver was ideal way to cement his fledgling Janata Dal’s electoral base. It didn’t work, leading him to Mandal Commission as his alternate populist device
5. But the combination of loan melas and waivers fatally wounded credit culture in rural India, making banks ever more wary about farm loans. Since 1990s, Congress adopted both devices — high food inflation and periodic farm loan waivers — as its purported ticket to the farm vote
6 P Chidambaram’s mass farm loan waiver in 2008, coupled with reckless lending to the infrastructure and real estate sectors in the subsequent five years, caused banks’ non-performing loans (NPLs) to soar anew.
7. The present govt has devoted much of its term in office to fiscal prudence and addressing twin balance sheet crises’ of 2014: a drastic deterioration in banks’ asset quality, and collapsing corporate net worth as corporates’ soaring debts failed to generate tcash flows needed
8. In April 2012, the RBI lowered its policy rate by 50 bp (from 8.5% to 8%) in response to reported WPI inflation of 7.6% and WPI inflation of 9.1% for February 2012. This proved to be a temporary reprieve, because CPI inflation was back above 10% by April 2012.
9. But RBI governor D Subbarao didn’t raise policy rate for next nine months,despite CPI inflation staying stubbornly above 10%. He then lowered policy rate by 25 bp in January 2013 when CPI was above 11%.There were no howls of protest about this utter debasement of RBI’s role
10. t is easily forgotten now that Raghuram Rajan’s RBI in 2014 had set an inflation target of 6% to be achieved by 2016. In reality, actual CPI inflation waned to less than 5% by Oct 2014 — . RBI should have cut interest rates far more in the subsequent four years.
11 Reformist governments that have lowered inflation and improved banks’ asset quality have repeatedly suffered athands of the electorate. When bank lending decelerates and real interest rates are high, economic growth slows. But the ground is prepared for acceleration in future.
12. But unlike in the past, this time around, thanks to the Jan Dhan Yojana, the vast majority of Indians have bank deposits.
13. If new depositors can be convinced that a waiver of politician-farmers’ loans amounts to theft of their hard-earned money to benefit a minority of well-connected ‘farmers’ they will rebel against recklessness of the party that has repeatedly tried to destroy India’s prospects
14. But a great communicator will need to convince the electorate of this logic.
