Populism in Indian banking
The government is pushing the lending institutions towards adopting frivolous lending standards
Finance minister P. Chidambaram recently censured public sector banks for lax collection of non-performing loans from affluent individuals. His rebuke shows an important but largely ignored aspect of policymaking in India: complete disregard towards the existence of opportunity costs.
There is no denying that affluent individuals must pay back loans they borrow from the banking system. But what smacks of hypocrisy is to find the country’s governing institutions pulling up banks for slow loan recovery on the one hand while literally forcing them to lend to borrowers who are hardly creditworthy on the other.
The Reserve Bank of India (RBI), for instance, obligates both public and private banks to allocate about 40% of their total loan advances towards supporting the so-called priority sectors such as agriculture, small-scale industries, housing and education, apart from specific branch requirements. It is obvious that neither RBI nor the government can know if borrowers in priority sectors are creditworthy, or if it is economically viable for banks to open branches in rural areas. The huge pile of non-performing assets (NPAs) in the balance sheets of banks points to the adverse effects of such institutional fiddling with banks.
In 2012, according to RBI, priority-sector lending contributed to almost half of the total NPAs of scheduled commercial banks despite less than 40% of actual total advances made by banks going into priority sectors. In fact, the cumulative figures hide the dire state of NPAs in nationalized banks, which had close to 60% of their total NPAs related to priority-sector lending in 2011.
The scrutiny of populist priority-sector lending, however, should not deflect attention from lobbying at top levels of business that allows affluent individuals to take banks for a ride. The Kingfisher episode serves as a good example, with public sector banks writing off the company’s debt by buying equity in the airline at a high premium—something that the company’s poor balance sheet didn’t warrant.
The final picture that emerges is one of rudderless public policy influenced by both populist and crony interests, with the governing institutions of the country seemingly concerned with the health of its lending institutions on the one hand, but also pushing the same institutions towards adopting frivolous lending standards, paying no heed to the essential trade-off
No comments:
Post a Comment