The poor can’t bank on the RBI

The latest RBI directive is one of those policies that favour the rich keeping their wealth, even when they default, while the poor lose far more than they even owe—sometimes their lives

A farmer at a rural bank branch in Dadri, Uttar Pradesh
A farmer at a rural bank branch in Dadri, Uttar Pradesh

Devinder Sharma

A few years back, a Haryana farmer was unable to pay back the Rs 6 lakh he had borrowed for an underground pipe. A local court sent him to jail for two years, and fined him an additional Rs 9.83 lakh. 

Not only in Haryana, in recent years hundreds of farmers across the country who owed petty amounts to the banks have been put behind bars for unpaid dues. If they are not sent to jail, the banks seize tractors and other movable assets, before impounding the farmers’ cultivable lands. 

Instead of coming to the rescue of these small-time defaulters, who are mostly unable to pay back the instalments because of a crop failure or a price crash, the Reserve Bank of India (RBI) decided to instead throw a raksha kavach (protective shield) around the rich crooks, the fraudsters.

Setting aside the principles of natural justice, it has allowed nationalised banks to undertake compromise settlements or technical write-offs for accounts classified as “wilful defaulters”. After a cooling-off period of 12 months, these defaulters—who have the ability pay but simply refuse to do so—can get fresh loans. 

If this is a valid resolution mechanism, as the RBI says, then the question that needs to be settled first is why this resolution has not been applied for farmers, the MSME (medium and small-medium enterprises) sector, and the middle class, which puts its hard-earned and tax-deducted money into getting a home loan or car loan.

Until then, I see no reason why goons hired by banks, non-banking financial companies (NBFCs) and the micro-finance institutions (MFIs) routinely apply harsh tactics to confiscate the movable possessions of defaulters in the latter categories. In a recent case, a car was seized by ‘recovery agents’ (read: goons) from a defaulter at a toll barrier.

Meanwhile, an NBFC chief recently apologised for the death of the pregnant daughter of a defaulting farmer in Jharkhand. She was mowed down while the recovery agents tried to drive off the tractor for which the loan was initially taken. The RBI? It looked the other way. 

First, the controversial RBI circular allows banks to enter into a shocking compromise with wilful defaulters, who actually should have been cooling their heels in jail by now. Then, when an uproar erupts, it issues a meek clarification that raises even more questions than it answers.

Either way, the RBI’s benevolence is reserved for the rich defaulters, who don’t give a damn about the rules and regulations the banking regulator prescribes. Why else does the number of wilful defaulters continue to swell by as much as 41 per cent over the past two years? 

Wilful defaulters—their number now 16,044—collectively owe Rs 3.46 lakh crore to the banks. In addition, media reports say Rs 100 crore <every day> has been lost to bank frauds and scams over the last seven years. Yet many of the wilful defaulters—the likes of Vijay Mallya, Mehul Choksi and Lalit Modi, who have fled the country—will now get a reprieve, with huge write-offs, and still be eligible for fresh loans! 

I wonder why the RBI has not shown such benevolence towards the petty defaulters. Why must small farmers serve jail terms while the rich crooks get a bailout and the bank takes a hefty haircut? The rich continue with their birthday bashes, expensive holidays and generally lavish lifestyle they can clearly afford. All it takes is to be rich enough for the bank to throw a protective ring around you.

Sometime I think the banking system itself is the primary reason for India’s growing inequality. After all, if the banks continue to treat borrowers who have defrauded the system with kid gloves, it exposes a game plan to keep the rich amassing wealth—not because they are talented at playing the market, but because banks bail them out of their mistakes with public money!

Already, the banks have written off over Rs 13 lakh crore of non-performing assets (NPAs) over the past 10 years. This new discretion being granted for banks to excuse wilful defaulters is the icing on every Richie Rich cake.   

While the All India Bank Officers’ Confederation and the All India Bank Employees Association have been critical of the new RBI policy, most business media have been supportive. Indeed, whenever a rule that benefits corporates emerges, a team of corporate economists emerges out of nowhere to defend it, howsoever wrong it may be.

It happened when Oxfam International asked about imposing a wealth tax to reduce obscene inequalities. Some economists in India had then said that raising a wealth tax from the minute layer of the wealthy in our population would not be ‘economical’. Baffling, for surely recovery from a few is easier than recovery from the many?

Even now, some economists are going to the extent of saying that while recovering a loan, a bank should not make any distinction over wilful defaulters, fraudsters and the indigent. If so, surely this privilege must apply to middle-class investors and farmers too? Yet those same experts in the media who questioned free travel for women on Karnataka buses at an annual cost of Rs 4,000 crore to the state government are conspicuously quiet about a proposed write-off of Rs 3.46 lakh crore!

I thought the RBI would at least stay away from such bias against the poor labharthi (aspiring to grow their wealth). On the contrary, the controversial circular clearly shows that the RBI has a lot to learn about equity economics. Instead we see a concerted double standard that favours the rich while scapegoating the poor for upsetting the national balance sheet and being a ‘moral hazard’ to society.

(DEVINDER SHARMA is an agriculture policy expert. This piece first appeared as a blog post)

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