Is India heading towards another financial crisis?

The 2008 financial crisis brought the world to a standstill. Even India was not immune from the impact of the crisis. But the impact was limited. The aftermath effects of the crisis continued to haunt India for a longer period of time. The dark clouds of another financial crisis are looming large over India.

Why is it said that India is heading towards another financial crisis?

Former RBI governor Raghuram Rajan has issued a caution about the possible financial crisis for the Indian policymakers. In the note to the estimates committee of parliament, he has highlighted the three major sources of potential trouble. They are:

  • Mudra credit
  • Kisan Credit Cards
  • Credit Guarantee Scheme for MSMEs

Mudra Credit:

Mudra Yojana provides loans upto 10 lakh to the non-corporate, non-farm small/micro enterprises. The loans to the small enterprises are provided through Commercial Banks, RRBs, Small Finance Banks, Cooperative Banks, MFIs and NBFCs. Under the three categories of ‘Shishu’, ‘Kishore’ and ‘Tarun’ the scheme aims to fulfil the funding needs of the micro units and small entrepreneurs. The moto of the scheme is to fund the unfunded.

Kisan credit cards:

Kisan credit cards aims to meet the comprehensive credit requirements of the agriculture sector by giving financial support to farmers. The scheme was introduced based in the recommendations of the R.V.Gupta committee. The scheme provides for short term credit limits for crops, and term loans.

Credit Guarantee scheme for MSMEs:

The Credit Guarantee scheme for MSMEs was introduced to make available collateral-free credit to the micro and small enterprise sector. The Ministry of Micro, Small and Medium Enterprises in association with Small Industries Development Bank of India (SIDBI), established a Trust named Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to implement the Credit Guarantee Fund Scheme for Micro and Small Enterprises.

Why are the three sources considered as potential troublemakers?

  • A total of Rs 6.37 lakh crore has been disbursed under the Mudra scheme. This amounts to 7% of the total outstanding bank credit.
  • The borrowers are mostly from the informal sector. As a result, the banks have to monitor them very closely. Banks neither have resources nor manpower to do the task efficiently. As a result, these loans may add up to the mounting Non-performing assets of banks.
  • The challenges with the small ticket loans under Mudra or Kisan credit scheme is that the small loans will drop under the radar and build into a large credit issue in course of time.
  • There is a growing contingent liability under the Credit Guarantee Scheme for MSMEs
Other factors which may make the financial crisis inevitable:
  • Growing populism and increasing burden to farm loan waiver. Waving farm loans more often destroy credit culture and eventually reduce the flow of credit in the economy.
  • Depreciating rupee and fuel price rise.
  • Possible outflows due to dear money policy of the Federal Reserve of US.
  • Impact due to US sanctions on Iran.
  • Reluctance on part of the government to take tough decisions in an election year.

Rather than taking insights from the note of former RBI governor, the political parties are cherry picking his findings to score brownie points. This makes the crisis inevitable.

 

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