Sage advice: on Raghuram Rajan's suggestions
Mains Paper: 3 | Economic Development
Prelims level: Non-performing assets
Mains level: Preventing a financial crisis
- Former RBI Governor Raghuram Rajan’s note of caution on the next financial crisis that could be building up needs to be taken in all seriousness.
- In his note to Parliament’s Estimates Committee on bank non-performing assets (NPAs), Mr. Rajan has flagged three major sources of potential trouble.
- Mudra credit, which is basically small-ticket loans granted to micro and small enterprises; lending to farmers through Kisan Credit Cards; and contingent liabilities under the Credit Guarantee Scheme for MSMEs, run by the
Small Industries Development Bank of India.
- The disbursement under Mudra loans alone is ₹6.37 lakh crore, which is over 7% of the total outstanding bank credit.
- These loans have been sanctioned under the Pradhan Mantri Mudra Yojana, which aims to ‘fund the unfunded’, and is a signature scheme of the NDA government.
- Given that these are small loans up to ₹10 lakh each, with the borrowers mostly from the informal sector, banks have to monitor them very closely.
- It is debatable whether banks have the resources and manpower to do this when they are chasing the bigger borrowers for business and, increasingly these days, recoveries.
- The risk is that these small-ticket loans will drop under the radar and build into a large credit issue in course of time.
- Mr. Rajan’s advice on loan waivers has been made by him and others in the past. But the political class has chosen to turn a deaf ear to this advice, vitiating the credit culture and creating a moral hazard where farmer-borrowers assume that their loans will invariably be waived off.
Restructuring the banking policy
- The former RBI Governor has strongly defended the RBI against criticism.
- He rightly termed as “ludicrous” the allegations that the economy slowed down because of the RBI.
- Recognition is the first step in a clean-up, and unless banks are cleaned of their non-performing loans, they cannot make fresh loans.
- The Central government should also take note of some forward-looking statements that Mr. Rajan has made on the governance of banks. Among his suggestions to avert a recurrence of the current mess are, professionalising bank boards with appointments done by an independent Banks Board Bureau.
- By inducting talent from outside banks to make up for the deficit within; revising compensation structures to attract the best talent; and ensuring that banks are not left without a leader at the top.
- It is a comment on the state of our polity that despite the important issues that Mr. Rajan raised, political parties have chosen to pick only the points that are convenient to them.
- It’s about the period when these bad loans were made and the purported inaction over a list of high-profile fraud cases highlighted by him.
UPSC Prelims Questions:
Q.1) Which among the following are steps taken by the Government of India to promote financial inclusion?
1. Promoting Basic savings bank deposit accounts (BSBDAs)
2. Business Correspondent-Information and Communication Technology (BCICT) transactions
3. Atal pension yojana
4. Pradhan Mantri Mudra Yojana
Select the correct answer from the codes given below.
(a) 1 only
(b) 1 and 2 only
(c) 1, 2 and 4 only
(d) 1, 2, 3 and 4
UPSC Mains Questions:
Q.1) What are the suggestion made by Raghuram Rajan to prevent a financial crisis?