Trader's Credit Card Scheme - Concerns

Why in news?

In a traders’ convention held recently, Prime Minister Narendra Modi suggested bringing in a traders’ credit card scheme.

What is the proposal?

The traders’ credit card scheme would be similar to the Kisan credit card scheme available to the famers.
Under this, loans as much as Rs 50 lakh would be made available to traders without any collateral whatsoever.

What is the rationale?

Many traders have faced a cash squeeze after the twin blows of demonetisation and the introduction of the GST.
Resultantly, credit has become hard to come by.
The scheme thus comes as an acknowledgement of this impact on small traders.
It is thus necessary for the good of this particular sector as well the economy to ensure that credit flows more freely to the trading sector.

Is it a sustainable idea?

India has gotten credit mostly wrong over the past decades.
The past decades have shown that loan melas, whether for the rural sector or for infrastructure, rarely achieve their ends.
Ultimately, directed lending, especially collateral-free one, ends up stressing those banks that have been forced into making these loans.
E.g. nationalisation of banks was originally justified by the need to force credit into “priority” sectors of the planned economy
However, experiences show that when nationalised banks turn into tools of government policy, they fall into crisis in the medium to long term.
Moreover, the idea of a collateral free credit is not advisable at this moment of the Indian financial sector.
It's because the banks are yet to properly emerge from the current bad loans crisis.
Infrastructure, construction, power, and commodities lending continue to remain stressed.
Alongside this, government has already added some committed credit responsibilities such as the MUDRA loans.
Notably, MUDRA loans have seen a leap in misuse of funds over the past financial year.
So in many ways, the new trade credit scheme would add yet another source of bad loans to the banks’ list of directives, causing further an economic slowdown.

Source: Business Standard

Author: Shankar IAS Academy Chennai