Loan Melas is about to make his comeback; Do they really work? Here is an analysis

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The word “loan mela” was coined in the 1980s when the central government ordered banks to provide loans to the poorest segments. The move came under heavy criticism for diluting lending procedures and weakening the credit culture.

To lend melas are set to make a comeback with the government pushing banks to conduct another credit outreach program to boost small business credit flows ahead of festival season.

The word ready mela was invented in the 1980s when the central government ordered banks to provide loans to the poorest segments. The move came under heavy criticism for diluting lending procedures and weakening the credit culture. The intention was good to link the villagers directly to the banks, to increase rural expenditure and therefore consumption. But, experts objected to the principle that the government uses bank deposits to achieve a political goal. The process left the banks with huge bad debts. So, should we be wary of it?

First, the comparison to the 1980s may be unfair because the banks were almost 100 percent government owned. Even the deposit and loan rates were set by the RBI. Credit directives often came from the owner – the government and also the regulator, RBI. So even though there were concerns about indiscriminate loans, these deposits were fully guaranteed by the sovereign.

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But now the situation is different – PSBs are now listed entities and are therefore subject to scrutiny by shareholders and the market. They can afford to lend indiscriminately because they compete in the market with other private players for capital. A repetition of the practices of the 1980s is therefore unlikely.

So, let’s take a look at the latest awareness program of 2019. Did it decrease the flow of credit significantly?

According to reports, banks have disbursed nearly 1.8 crore lakh in loans, but there is a catch! A portion of these were loans approved before these melas and were only sanctioned during the time. Thus, the loans actually granted during these melas were lower than the overall figure. How many of these loans have gone wrong? We don’t have any data yet. We will only know at the end of the cycle and even then we may not get separate data.

This time around, the banks say the government has yet to set a target but has asked them to focus on the eastern and northeastern states, where the credit deposit rate is low. The deposit-to-credit ratio simply indicates how much money collected from deposits was used in the form of loans.

Let’s look at the CD ration in the regions of India. Yes, it is lower for the northeastern states and eastern regions compared to others. But the regional distribution of borrowers and savers is never the same. For example, the amount of bank deposits may be higher in Jharkhand, Bihar or West Bengal, but the demand for loans may not be so high due to low economic activity, lower cost of living, etc. While in western regions like Mumbai, the deposit may be lower because more people can invest in stocks, among other financial instruments, but the demand for loans may be higher because there is more economic activity. . Thus, the areas chosen by banks to deploy credit are a business decision determined by the demand for loans.

In summary, while the loan melas to have a positive influence by forcing banks to focus on underbanked areas, ordering one segment of the financial system – the PSBs – to lend is unfair. It also happens when unsecured credit turns out to be risky due to COVID-related disruptions and we don’t know the impact of the previous 2019 campaign on asset quality.

(Edited by : Bivekananda Biswas)

First publication: STI


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