Loan melas set to make a comeback; do they really work? Here’s an analysis

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But now the situation is different – PSBs are now listed entities and hence come under the scrutiny of shareholders and the market. They can’ afford to lend indiscriminately because they compete in the market with other private players for capital. So a repeat of the 80s practices is unlikely.

So, let’s look at the last outreach programme of 2019. Did it drop credit flow significantly?

According to reports, banks disbursed nearly 1.8 lakh crore loans, but there is a catch! A part of these were loans approved prior to these melas and were only sanctioned during the time. So the actual loans given during these melas were lower than the headline figure. How much of these loans turned bad? We don’t have data yet. We will only know at the end of cycle and even then we may not get separate data.

This time around, banks say the government has not yet set any target but asked them to focus on eastern and northeastern states, where the credit deposit ratio is low. The credit deposit ratio simply tells how much of the money raised through deposits has been deployed as loans.

Let’s look at the CD ration across regions in India. Yes, it is lower for the north-eastern states and eastern regions as compared to others. But the regional distribution of borrowers and savers is never the same. For instance, the amount of bank deposits may be higher in Jharkhand or Bihar or West Bengal, but the demand for loans may not be as high because of low economic activity, lower cost of living, etc. Whereas in western regions like Mumbai, the deposit may be lower because more people may be investing in equities, among other financial instruments, but the demand for loans may be higher as there is more economic activity. So, which areas banks choose to deploy credit is a commercial decision determined by the demand for loans.

To sum up, while loan melas have a positive influence in forcing banks to focus on under-banked areas, directing one segment of the financial system –PSBs –to lend is unfair. This is also coming when unsecured credit is proving to be risky due to COVID disruptions and we don’t know the impact of the previous, 2019, outreach on asset quality.