TOI Mar 20, 2014, 12.06 AM IST
India's banking system is under stress following an increase in incidence of bad loans over the last four years. A part of it can be explained by the economic downturn. Some of it should be attributed to governments' vitiating repayment culture through debt waivers. Debt waivers, or other waivers such as the one granted to electricity bills of defaulters in Delhi, represent a damaging policy choice and have an adverse impact on consumer behaviour. These waivers use the taxpayers' money to pay a defaulter's bills and hurt the financial health of institutions as consumers begin to expect a repeat performance.
An argument against debt waivers is not a case against transparent provision of subsidies. They are unrelated. The essence of the issue is that borrower behaviour is influenced for the worse by state-sponsored waivers. The farm loan waiver of about Rs 65,000 crore in 2008, which was described by World Bank as one of the largest debt relief programs in history, had negative fallout. RBI later made a case that it was best for governments to directly transfer subsidies to beneficiaries as waivers made it difficult for financial institutions to enforce contracts. Following different episodes of waivers, finance ministers have had to incentivise borrowers to pay up in time by offering a subsidy on subsidised loans!
Micromanaging of banks by government, the largest shareholder in the banking sector, has not helped. Unlike a private shareholder, the government can dip into taxpayers' money to underwrite bad decisions. In this backdrop, when the majority owner intervenes repeatedly in operations, banks are pushed into taking decisions that help politicians and their handpicked borrowers. The cost is borne by the rest of society. Be it debt waivers or dubious corporate debt restructuring packages, state control of banking is counter-productive and should be dismantled.
An argument against debt waivers is not a case against transparent provision of subsidies. They are unrelated. The essence of the issue is that borrower behaviour is influenced for the worse by state-sponsored waivers. The farm loan waiver of about Rs 65,000 crore in 2008, which was described by World Bank as one of the largest debt relief programs in history, had negative fallout. RBI later made a case that it was best for governments to directly transfer subsidies to beneficiaries as waivers made it difficult for financial institutions to enforce contracts. Following different episodes of waivers, finance ministers have had to incentivise borrowers to pay up in time by offering a subsidy on subsidised loans!
Micromanaging of banks by government, the largest shareholder in the banking sector, has not helped. Unlike a private shareholder, the government can dip into taxpayers' money to underwrite bad decisions. In this backdrop, when the majority owner intervenes repeatedly in operations, banks are pushed into taking decisions that help politicians and their handpicked borrowers. The cost is borne by the rest of society. Be it debt waivers or dubious corporate debt restructuring packages, state control of banking is counter-productive and should be dismantled.
