Time for reconsider loans disbursals based on political agendas

I was appalled after reading a news item a few days ago that stated that the BJP government is asking public sector banks to lend to minority communities in line with its share of the total minority population within the 6% quota fixed for all minorities.

I was appalled because I believe loans must be given based on the creditworthiness of individuals and not because they belong to a particular community. This is similar to loans that were given by lottery during the early days of nationalisation; loans that went bad because they were given on a government diktat for political gains without sound reasoning.

I recollect a public sector banker mentioning to me that he had been instructed to disburse loans to farmers to dig wells. To meet his target he would seek villagers and disburse the money telling them to dig wells. He never checked whether these villagers wanted wells or whether the wells were dug. He met his target, the bank met its requirement and everyone was happy. Is it any wonder that vibrant, thriving banks that were booming in 1969 at the time of nationalisation became what they are now: burdened with ever increasing debt. Presently, banks are parleying with borrowers to restructure debt of Rs 1 lakh crore (that is a mindboggling Rs 1,000,000,000,000). And there is the machinery that makes it difficult for banks to function.

The Reserve Bank a few years ago came with a wonderful directive that stated that if, in spite of repeated attempts a borrower did not pay that that defaulter be declared a wilful defaulter. This was to warn other lenders and no bank was to lend further to that company or to any firm in which the directors of the company declared a wilful defaulter was a director. We know the sorry saga of Kingfisher Airlines and its purportedly Rs 7,000 crore debt.

The United Bank of India declared the company a wilful defaulter. The company appealed to the Calcutta High Court which reversed the bank's decision. The decision was not based on whether the company defaulted but on a technicality – the bank's redressal committee that made the decision had four members (The chairman, a chief general manager and two general managers) whereas RBI's instruction was that the redressal committee should only have three members. Come on. The issue was whether the company was a defaulter or not.

The finance minister is also nudging public sector banks to cut rates and push credit growth especially in the MSME sector for the successful implementation of the 'Make in India' programme. As I said earlier lending has to be on the creditworthiness of proposals and not to meet political agendas if we are to have a vibrant economy. Good proposals must always be supported whether they are from entrepreneurs, start-ups or MSMEs but loans must not be based on quotas and targets.

It is also high time now after nearly 70 years of independence that we dispensed off with quotas and reservations for communities and individuals and focused on merit and ability. We cannot build a vibrant economy otherwise.

On the economy, retail inflation has risen to 5.37%. Exports fell (15% in February) for the third month in succession and industrial production is down. The trade deficit reduced and that was because of a fall in oil prices (imports lower by 55.49% year on year) and lower imports. The dollar strengthened too and as a consequence on Friday the Sensex plunged 427 points.

In this there can be opportunity in purchasing those shares that have the potential to grow in sectors that are vibrant such as banking, pharmaceutical and the likes. It is also that time of the year to invest in Section 80C investments to take advantage of tax benefits. Caution and deep thinking is what is required now for if you throw that to the wind, you will never forgive yourself. It is no fun repenting at leisure.


The writer is MD, Cortlandt Rand, and an author