The ministry of corporate affairs is reported to be working on a universal debt relief scheme for small borrowers. If loans can be written off for farmers and big companies, why discriminate against small borrowers? Such an argument for equality is misplaced. Writing off loans for micro enterprises might not harm banks in the short run, if the government reimburses them the loans written off, but it would damage credit culture and endanger the network of semi-formal lenders that meet a large part of the economy’s credit needs. After many borrowers in Andhra Pradesh stopped repaying their loans from microfinance institutions (MFIs), following an irresponsible loanwaiver campaign by some political parties, credit dried up for small borrowers. It would be a mistake to sponsor a similar experience nationwide.
Already, small loans given under the Pradhan Mantri Mudra Yojana to micro enterprises threaten to turn bad. A universal debt relief waiver would swamp MFIs with unserviced loans, shutting off a crucial source of credit far superior to the moneylender. In normal times, MFIs report recovery rates of over 97%. Lack of confidence in the institutional framework of capital allocation, accounting and servicing of the capital deployed explains why global savings scouring the world for profitable deployment skips, for the most part, a market like India with dire need for investment and great opportunity to make profits. Destroying credit discipline would harm the burgeoning fintech industry that has the potential to draw in tonnes of global capital. Fintech companies hold great promise for financial inclusion and access to new, low-cost services. Scarring their potential by killing credit discipline helps no one.
Small and micro enterprises need efficient bond markets and derivatives that distribute associated risks as widely as possible. New ways of assessing credit risk, based on analysis of large-scale, structured and unstructured data on borrowers and their enterprises, must replace collateral as the basis for credit decisions. Loan waivers scupper all that possibility.
