The Rational Behind Writing Off NPA for Industries vs. General Public Loans

In the context of the Indian economy, the recent large-scale write-off of Non-Performing Assets (NPA) by the Modi Government has sparked debates. While some argue that similar steps should be taken for the general public, it is crucial to understand the nuances that underpin the rationality behind offering such leniency to industrial finance. This article aims to provide insight into the economic principles and practical considerations that shape this dichotomy.

The Universal Truth of Industrial Finance

The basic truth of industrial finance is stark and unambiguous: four out of ten industrial ventures never succeed financially. This is a universal truth that extends beyond the Indian context and is recognized globally. When industries fail, it is not merely a matter of individual business failure but rather an impact on the broader economic fabric. The economic and social consequences of business failure are significant, affecting employment generation and overall economic stability.

Impact on the Indian Economy and Employment Generation

The financing of industries is not just about economic gain but also about job creation. If industries are not financed, the ramifications are far-reaching. Not only does this prevent the growth of new businesses, but it also hinders the creation of new jobs. Employment generation is a key driver of economic growth, and when industries are underfunded, this growth is stunted. Additionally, when industries flourish, the positive spillover effects on the economy are manifold. Innovations, technological advancements, and increased market capacity contribute to the overall economic health of a nation.

Understanding NPAs in Industrial Loans

It is well-documented that a significant portion of industrial loans—estimated to range from 30% to 40%—often turn into Non-Performing Assets (NPAs). These NPAs are borne by financiers and the government. The write-off of NPAs for industries, therefore, is not just a fiscal move but a strategic decision that aligns with the broader economic goals of the government. The willingness to bear this cost is driven by the understanding that the returns on investment in the long run far outweigh the immediate financial losses.

The Case of General Public Loans

When it comes to loans granted to the general public, the situation is quite different. The loans to individuals and households are often unproductive or consumption-oriented. Unlike industrial loans, these loans are not aimed at generating productive capital or fostering economic growth. Instead, they are typically used for personal expenses such as consumption, education, and healthcare. Given the low productivity of such loans, the government and banks cannot afford the luxury of writing off NPAs. Granting waivers for unproductive loans could have significant negative repercussions on the financial health of the institutions involved, potentially endangering their ability to lend and support more deserving ventures.

Providing Relief to Productive Loans

However, it is important to note that not all loans to the general public are unproductive. Some agricultural loans, for instance, are crucial for the economy and deserve special treatment. The government does provide waivers for agricultural loans from time to time, recognizing the specific needs and challenges of the agricultural sector. This targeted approach ensures that productive loans receive the necessary support, while less productive loans are not burdened with the same level of financial support.

Criticism of the Approach

While the differentiation between industrial and general public loans is understandable, it is frequently criticized for being biased. Critics argue that the approach is not purely merit-based and may be influenced by political alliances. For instance, it is suggested that certain corporate entities give financial support to the BJP (Bharatiya Janata Party), a political party, which in turn grants them substantial benefits. This perception of bias can undermine public trust in the fairness of the financial system.

Conclusion

The complexities of lending and the differentiation between NPAs in industrial versus general public loans are rooted in the economic realities and practical considerations. While the government may be more lenient with NPAs in industrial finance, this approach is justified by the broader economic benefits. At the same time, the need for fiscal prudence dictates that unproductive loans are not afforded the same leniency. Balancing these considerations is a delicate task that requires a nuanced understanding of the economic landscape.

The ongoing debate over the rationale behind writing off NPAs highlights the need for transparency and fairness in the financial sector. As the economy continues to evolve, so too must the policies that govern it, ensuring that all stakeholders are treated with equity and that the overall prosperity of the nation is maximized.

Keywords

NPA, Industrial Finance, Loan Writed-off, Banking Policy, Economic Impact