Speaking at the Columbia University, the Indian finance minister, Nirmala Seetharaman held responsible the former Prime Minister Man Mohan Singh for indiscriminate bank credits on basis of crony calls. She lamented that otherwise a brilliant economist Dr. Raghuram Rajan permitted it as the Reserve Bank governor. Earlier speaking at the Brown University, Dr. Raghuram Rajan warned against the practice of allowing a lone single person imposing all his wishes on the economic system.

It appears that the finance minister discovered for the first time in the sixth year of the NaMo regime the cause of ills and evil afflictions of banking sector. Her predecessor Arun Jaitley the finance minister in the first NaMo term was not even aware of it. Otherwise he would have taken immediate correctives instead of allowing the fester to spread and corrode the backbone of the economy.

In his five years, he did not need to resort to corrective measures as no bank complained of huge loss in their operation. Nirmala Seetharaman was forced to resort to propose merger of several small banks to convert them into a larger entity. However her solution was no remedy as new conglomerates were merger of liabilities and not of assets. Their assets did not erode in their lending but due to additional maintenance expenditure for new accounts that did not add to them ability to earn. Their revenues from their lending also began to dwindle with directive from the Prime Minister’s office to recover their all lending as Not Performing Assets. The PMO reached the conclusion as no sector of the economy reported positive growth pattern in the last three years. On the contrary rising menace of growing unemployment since demonetization became the bugbear for the PMO. It may have led it to conclude that bank credits were not instrumental in boosting the growth. Hence the credited amounts should be recovered. Some thought was needed to provide alternate sources of income if only available avenues of incomes for banks of only source of their income, interests on their credits was to be shut y directive to withdraw all credits. The heavy drop in automobile sales can also be attributed to unwillingness of most banks to extend credits.

Amounts with all types of bank deposits at Rs.150.4 lakh crore constituted equivalent to half the size of and bank credits at Rs. 72 lakh crore came to nearly one fourth of the size of Indian economy. The amount of total deposits with Indian banks in 1971 was Rs. six lakh crore. The economy grew at the rate of 3.5 per cent average till 1991 but the deposits amount had swelled to Rs. 92 lakh crore. Now rumours are in circulation over the social media meaning in the middle class circle raising doubts of bank deposits security. After the collapse of one small bank PMC, advice in circulation was to encash deposits. It means compounding the crisis even further. But the government has not made a move to scotch such messages. Instead the finance minister is busy finding faults with the previous regime.

There was no perceptible change in ratio of total deposits with banks and their lending between the six years of the Vajpayee government or the decade of the Man Mohan Singh regime. The balance was affected for the first time following directive to banks, particularly public sector banks to recover all their lending as Non Performing Assets. Taking back lending also meant forsake their revenue. At the same time they were burdened with heavy expenditure for maintenance of huge number of accounts under the Jan Dhan Scheme. Both directives emanated from the same single source. 250 million accounts were added under the scheme without any contribution to incomes. The Prime Minister claimed in his address to the UN General Assembly that 370 million new bank accou7nts were added. Each account demands monthly expenditure Rs. 310. It works out to be burden of Rs. 1.40 lakh crore without avenue to recover it. The yearly maintenance expenditure comes to be 2 per cent of their total lending.

There was no scope for doubts over the genuine motivation of the Prime Minister of providing social security to unorganized sector or proving that the Indian economy had come of age with 370 million new bank accounts. It may facilitate remitting of subsidies dues without corrupt taking their cut. However he ought to have been advised what his idea would mean additional expenditure load to banks, to maintain accounts without earning anything out of their additional burden. Dr Rajan meant by his warning that all powers on economy or for that matter for life in the country cannot be allowed to remain in one hand. The autocracy would, due to its nature tend to overlook need to evaluate the consequent logic flowing from events the ruler generates.

The belief propagated by his fan club that indiscriminate lending was done in previous regimes may be true but its aftereffects were not so grave to bring a disaster earlier on their regimes to the banking system. The solution of combining loss making small banks may not bring down unanticipated burden of maintenance. The finance minister is seeking wrong solution by pushing forward the merger proposal.