The limits of loan melas

• Follow

The pandemic wreaked the economy like never before. The economy contracted by a massive 7.3% in FY21. As people were locked indoors millions lost jobs and a huge number had their wages slashed. Numerous small businesses had to shut shop. The outcome resulted in a massive decline in demand of innumerable goods and services, both essential and discretionary. As the second wave gradually receded and the economy staggered to its feet, policymakers and economists began to watch out for one indicator more than anything else – revival in demand.

Revival in demand of goods and services is the single biggest factor that can infuse life into the economy. But revival in demand can only happen when two conditions are met – people have money in pocket and they feel confident about spending. There is a deficiency in both parameters.

Desperate to induce spending the government is urging the banks to offer loans. While interest rates of various types of loans have hit rock bottom, the government is encouraging loan melas. As a policy tool, loan melas have limited utility. They might induce some people to spend but it might also push up the non-performing assets of banks, thereby triggering another type of headache for the future.

Loan melas originate in the 1980s and many ascribe the rise of non-repayment of loans to the culture of loan melas. A government that insists on lean balance sheets of banks should not try to force loans down the throats of those who are not confident of repayment. Following the pandemic there has been rise in defaults in almost all categories of loans from housing to education. NPAs have plagued MUDRA loans too that were designed to promote micro-entrepreneurs in the country.

Loan melas were held in October 2019. It is reported that district-wise loan melas will be held from November this year. Making credit available to both businesses and consumers is a wise step; but holding loan melas to distribute loans might not be prudent. Loan melas might aim for an illusory quick fix. But it would certainly not be enough. If jobs return to idle hands, confidence to spend will closely follow. And demand will rise, creating more employment.