Uday Kotak the outgoing President (2020-21) of CII’s quip---if not now when---in the context of urging the government to resort to deficit financing or its euphemism money financing aka printing of fresh currency notes has been widely noted and with evident approval in some quarters. That was in the course of an interview with NDTV on 26th May 2021.
His impassioned plea for monetary expansion had two objectives---putting money in the hands of those at the bottom of the pyramid and to help the manufacturing sector particularly the MSME revive.
There can be no debate on helping the poor who have lost jobs but due care must be exercised in extending further loans to the MSME sector lest good money is thrown after bad. Indeed India’s saga of NPA is largely a story of evergreening which is deception practiced by borrowers to get fresh loans and of behest lending often to habitual defaulters which Prime Minister Modi picturesquely and caustically described as mobile banking. The government must ensure that while giving a helping hand to borrowers its own isn’t be singed. The deadly contagion effect of NPA ultimately takes a toll on taxpayers’ money.
Kotak said, "The government last year announced a very successful lending scheme by banks for the stressed sectors. I'd recommend that the scheme be expanded from the current Rs 3 lakh crore to Rs 5 lakh crore and more sectors be included so that greater support to the economy can be given as soon as possible."
Last year’s scheme the encore of which Mr. Kotak is advocating was called Emergency Credit Liquidity Guarantee Scheme under which the central government stood guarantee for the collateral-guarantee free (from borrowers) loans given by banks to the MSME sector. Borrowers with outstanding credit up to Rs 50 crore as on February 29, 2020 and with an annual turnover of Rs 250 crore were eligible for loans under the scheme the centerpiece of which was 20% further loan with reference to the outstanding loan as on the above cut off date. These are early days. No one knows whether these loans have been serviced because the pandemic paused but for a very short while before returning in a more virulent form.
There is thus a need for doing the balancing act, the tight-rope walking so that the economy is revived while at the same time good money is not thrown after bad. Further loans should be given preferably to those whose utilization report is satisfactory and repayment record is good. Time has come for banks to make increasing use of ESCROW mechanism which was the centerpiece of power sector reforms---the lender would be serviced from out of the dedicated bank account into which heavy-duty customers pay.
That may be easier said than done in the MSME sector which may not be having heavy-duty customers. Nevertheless, decks have to be cleared for institutionalizing this mechanism almost as a panacea for the festering problem of NPAs. All other remedies including collaterals and guarantees have not yielded the desired results. The nascent (2016 born) Insolvency and Bankruptcy Code (IBC) were proving its worth before Covid halted it. The short point is the vicious cycle of loans, defaults, provisioning and recapitalizing by the central government with taxpayers’ money cannot go on forever.
Uday Kotak should know because his own bank’s stellar performance has been attributed to its reluctance and chariness in extending industrial loans notorious for defaults. It takes a crisis including a pandemic to throw up brilliant solutions to vexed problems. The Modi government should seize the opportunity to extend the collateral-guarantee free loans to the corona-scarred MSME sector subject to the ESCROW clause. And it should boldly mandate that listed companies cannot seek bank loans but instead must issue bonds in the market.
Market is a great discipliner, indeed a martinet of a discipliner. Defaulters are accorded the chastening junk bond status, driving the quotations down precipitously and thus heightening the yields. Optional convertibility clause written into them would further goad the issuing companies to honor their commitments.
S. Murlidharan is a CA by qualification and writes on economic issues, fiscal and commercial laws. The views expressed in the article are his own
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(Edited by: By Aditi Gautam)
First Published: IST