Deen Dyal, who runs a tea stall on the outskirts of New Delhi, was beaming when he walked out of a community hall where Punjab National Bank was disbursing loans as part of government efforts to get credit flowing back into the economy.
A 50,000 rupees ($700) loan he applied for a year ago to expand his range of snacks had finally been approved.
Reviving a practice not used in three decades, India’s government in September ordered state-run banks to hold more than 400 loan “melas” or fairs across the country over the following month – a measure aimed at boosting economic growth at six-year lows and lending growth at its weakest in three years.
Dyal, 32, said PNB previously refused him a loan despite repeated requests. But once the government announced the melas, he’d been inundated with calls from bank officials to grab an approval letter there.
“I had to lose half a day of wages to come to the mela, though the loan could have been given at the bank branch itself,” he said.
The Finance Ministry said the melas “disbursed” loans worth about 2,500 billion rupees ($35 billion) in October, with some private and shadow banks joining 18 state-run lenders. Several bankers told Reuters, however, the figure also included loans that been approved before the fairs.
It represents a record for monthly lending and a huge jump over the $12 billion in overall Indian bank loans given in September.
But bankers and analysts worry the October result is but an artificial and temporary spike in lending, and that normal due diligence standards were abandoned which will come back to bite a sector already saddled with $140 billion in stressed debt.
“Not much paperwork was done in sanctioning the loans,” said one banker involved in organizing a mela in India’s most populous state, Uttar Pradesh.
The banker, who was not authorized to speak to media and declined to be identified, said the usual checks on income tax returns or to verify property ownership were dropped and instead limited to bank account statements and repayment history.
Pressure to lend felt intense, bankers said.
At the launch of the fairs, Finance Minister Nirmala Sitharaman declared: “For every new customer given a loan, there will be five more coming in their wake.”
“Somebody who has never taken loan from the bank should be brought in and given a loan,” she added.
IF HISTORY IS ANY INDICATION
Banking and policy experts said government lending schemes had a track record of skimping on due diligence, leading to higher-than-normal levels of bad loans.
“Banks usually lower their guards on the risk profiling of borrowers and we have seen this earlier as well in government related schemes,” said NR Bhanumurthy, an economist at India’s National Institute of Public Finance and Policy.
In the 1980s, when loan melas were established to boost rural consumer spending, the rules were so lax that a phone number was viewed as proof of residency and income, and was sufficient to get a loan, said an executive director at a public sector bank, requesting anonymity.
During that era, bad loans increased and bank profitability took a hit. Return on assets – a key performance gauge – slid to 0.15 per cent in 1990 from 0.56 per cent in 1980, according to a central bank report which cited the melas as a contributing factor.
More recently, Prime Minister Narendra Modi’s flagship lending scheme for small businesses has seen bad debt surge in the past year, according to online media publication The Wire.
Non-performing loans for Pradhan Mantri MUDRA Yojana, which was set up in 2015, jumped 126 per cent in the past financial year to 164.81 billion rupees ($2.3 billion), the report said, citing data gained from a “right to information” filing.
The Finance Ministry did not respond to request for comment about MUDRA loans.
India’s huge bad debt problems have long choked the banking system’s ability to generate fresh lending – a problem that has worsened this year with the shadow banking industry reining in loans after the collapse of lender IL&FS.
While that may have helped prompt the government’s call for loan melas, for many experts it is only a step backwards.
“With lot of difficulty the central bank has been trying to resolve this whole bad loan problem and why do we want to bring it back even if it comes at the cost of some additional economic activity,” said Amol Agarwal, an assistant professor at Ahmedabad University’s Amrut Mody School of Management.