Tuesday 6 October 2020


The Mudra scheme has raised the NPA specter for Indian PSU Banks once again, with the NPAs rising at an alarming rate. Mudra loan disbursements by state-owned banks rose to Rs 3.82 lakh crore in 2019-20, from Rs 3.05 lakh crore in 2018-19 and Rs 2.12 lakh crore in 2017-18. NPAs as a percentage of total loans rose to 4.92 per cent in 2019-20 from 3.42 per cent in 2017-18.

It was utterly foreseeable during its announcement that this would be the case. What seems to be a populist measure under the garb of supporting micro-scale economic initiatives is a ruinous method to put the financial system under pressure. It does not take any imagination to surmise that this is a method to funnel money without adequate scrutiny to people and accounts by those in power. This is a form of planned leakage of funds where banks are enabled and even pushed to release funds, resulting in anticipated circumvention of any form of checks and balances. These measures go on because it is a win-win for those who participate in the system. The local politicians can get the banks to issue loans to people in their clique, the senior bank officials can do the same, the customers get easy money, and in the end, no one is accountable. Initially, everyone claims success and glory by quoting large disbursement numbers and how they are doing a fantastic job and helping people and the economy. In the aftermath, when large scale NPAs result, the banks blame the pressures from the government to disburse, the government blames the banks and other circumstances all the while building a case for the government to compensate for the losses and remonetise the banks. The system is exploited by politicians and bankers, while the real burden eventually falls on the taxpayers, including the small and micro-businesses that pay taxes. In times of distress like in the current COVID situation, the government has no money to save existing businesses and reimburse taxpayers’ money that is required to save this tax-revenue generating machinery. This is the worst kind of financial and economic governance that will engender long-term dependence, perpetuate exploitative practices and venality. Several apologists see this as the mechanism for distributing money to the grassroots, and a few other countries too use such schemes, but that does not build a real case for this hugely inefficient mechanism for doling out funds.

There is no mechanism to scrutinise such schemes, and there is no system of accountability. Independent agencies need to rate such schemes for its robustness. Currently, most such schemes are put on display for public commenting and at the most subjected to political debate in the parliament, which is clearly partisan and only serves to obfuscate,  with no clarity on the real merits of the case. Also, we need the case to be reviewed by independent experts and make the commentary public.

It is essential to create systems that put the banks out of politicians reach, and the case for a bail-out or compensation should only be done in the rarest of rare cases. Also, when any scheme is announced, it is crucial to anticipate NPAs using a transparent mechanism, and an acceptable threshold of NPAs must be announced to measure the performance and functioning of control mechanisms of the banks.

Any excesses must be investigated through independent forensic audits and institutional penalties must be levied. Additionally, individuals who have indulged in fraudulent, negligent and unethical practices must be weeded out and subjected to appropriate legal action.

There is a much greater need for scrutiny of banking operations through independent mechanisms. The timing of exercising checks is also crucial, instead of only doing post-mortems, random sampling for scrutiny, while disbursements are being made, is an essential check that must be widely used.

RBI has limited powers when it comes to PSU banks as compared to private sector banks, and this creates issues in exercising the right kind of power over them. But the RBI retains the right for issuing audits and must exercise these when the NPAs exceed a specific limit, and there are questionable results. The system of regulatory oversight must be strengthened for PSU banks. Even if the RBI does not have the right to penalise board members of PSU banks, they can investigate and issue reports and recommendations for actions. They must exercise these in greater measure.

The independence of the RBI from the government is meant actually to create this arm’s length relationship, but we know that the RBI too is not entirely free from the government’s influence. Right from the recruitment of RBI governors, who are appointed after the proposal made by the Financial Sector Regulatory Appointments Search Committee (FSRASC), headed by the Cabinet Secretary, to their dismissals, to attempts to get more government representation on the RBI board the government continually tries to influence the RBI. While everyone accepts that the RBI’s autonomy is an essential and accepted governance requirement and must be maintained at all costs, in practice, there is a constant tussle and meddling.

While some suggest privatisation as the solution, the reality is that private banks are driven by the sole motive of profit and have their own ways of exploiting the customer base and loopholes through off-balance sheet liabilities and other fraud mechanisms. So frankly, there is no substitute for robust regulatory and oversight frameworks that are free from conflict of interest and impermeable to government interference. Unless we really think and institute mechanisms with rigour the powerful will continue to exploit the system for their gains and the system will continue to work through nefarious means.