Banking System Cannot Turn into a Safety Net

Published: 02nd August 2014 06:00 AM  |   Last Updated: 02nd August 2014 12:47 AM   |  A+A-

The Reserve Bank of India’s (RBI) refusal to go along with Andhra Pradesh chief minister Chandrababu Naidu in rescheduling farmers’ loans might be politically inconvenient for Naidu who had promised to waive off farmers’ loans during his election campaign, but the central bank is right in refusing its consent to give special regulatory dispensation for an estimated `43,000 crore loan sought by him. The RBI governor has two good reasons for taking a principled stand. First, the implications of a loan waiver are much more disastrous to the poor compared with temporary relief. Secondly, making an exception in the case of one state could spur similar demands from others. Telangana is already planning a similar waiver and other states going for elections may be tempted to follow this path of political populism.

The desire to provide relief to a segment of citizens in times of distress is understandable in a welfare state. But using the banking system as a safety net is the wrong way to do it. If the governments want to provide safety nets, they must do so out of their budgets and not dump it on the banks. As is known, one reason why the public sector banks are in trouble is the so-called bad loans which they have to give under political pressure. Since the ordinary depositors are likely to suffer as a result, this practice of robbing Peter to pay Paul has to stop.

It is also time for politicians to stop making extravagant promises although they know that the states do not have the requisite resources. Their cynical calculation is that by passing the buck to the Centre, they can pose as innocent victims of the Centre’s parsimony. However, these tricks have been used too often to carry any credibility. Today’s voters are far more aware of the way in which the governments function than when they presumed that the latter have unlimited funds. A state cannot act like a charitable organisation.

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