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What is Trader’s Credit Card Scheme?

What is Trader’s Credit Card Scheme?

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  • GS3 || Economy|| Banking & Financial Sector || Commercial Banking

Why in news?

  • Prime Minister Narendra Modi promised to provide loans up to Rs 50-lakh loan without any guarantee to traders, along with credit card facility and a pension scheme for small shopkeepers.

Proposal

  • Traders’ credit card scheme: The prime minister said a traders’ credit card scheme similar to the Kisan credit card would be introduced.
  • He also said loans would be made available to traders — loans of a ticket size of as much as Rs. 50 lakh, without any collateral whatsoever.

Rationale

Conceptually, the aim of this loan is understandable.

  • Cash squeeze: Many traders have faced a cash squeeze after the twin blows of demonetisation and the introduction of the goods and services tax, or GST.
  • Credit flow to trading sector: Credit has become hard to come by. It is thus necessary both from the point of view of this particular sector as well as for the economy generally to ensure that credit flows more freely to the trading sector. However, directed lending of this sort is always a bad idea.

Sustainability

  • Past experience: The past decades have shown that loan waivers, whether for the rural sector or for infrastructure, rarely achieve their ends.
  • Stressed assets: In the end, directed lending, especially collateral-free directed lending, ends up stressing those banks that have been forced into making these loans.
    • Priority sector lending: The entire history of bank nationalisation up to the present day — a nationalisation that was originally justified by the need to force credit into “priority” sectors of the planned economy — shows that when nationalised banks are turned into tools of government policy, they fall into crisis in the medium to long term.
      • In fact, the banks are yet to properly emerge from the current bad loans crisis.
      • Infrastructure, construction, power, and commodities lending remain stressed.
    • MUDRA loans: The government has added fresh pain points already such as the MUDRA loans, which have seen a leap in delinquency over the past financial year.

Way forward

  • Promises of concessional or collateral-free credit will eventually have to be paid for as surely as direct income transfers.
    • But, unlike the latter, loan waivers have the additional cost of stressing the entire financial system and raising the chances of a freeze in bank lending that causes a more generalised slowdown or crisis.
  • This promise should have been discussed in greater detail if it is indeed a serious one. As it now stands, it would be a bad idea to implement.

Additional info

  • The Kisan Credit Card (KCC) scheme is a credit scheme introduced in August 1998 by Indian banks.
  • This model scheme was prepared by the National Bank for Agriculture and Rural Development (NABARD) on the recommendations of R.V.Gupta committee to provide term loans and agricultural needs.
  • Its objective is to meet the comprehensive credit requirements of the agriculture sector by giving financial support to farmers.
  • Participating institutions include all commercial banks, Regional Rural Banks, and state co-operative banks.
  • The scheme has short term credit limits for crops, and term loans.
  • Kisan Credit Card (KCC) offering credit to the farmers in two types viz,
    • Cash Credit
    • Term Credit (for allied activities such as pump sets, land development, plantation, drip irrigations).

Mains question

  • Politicians need to realise that the public sector banking system is not a free source of cash for re-election. Discuss in light of loan waivers, collateral free loans announced as election sops.