Freebies have once again taken the centre stage in public discourse as Prime Minister Narendra Modi made multiple remarks against the practice in recent days. In response, his critics have been highlighting the loan write-offs made by banks in recent years and dubbing them as ‘freebies for corporates’.
However, Delhi Chief Minister Arvind Kejriwal retorted on Monday asking “what is wrong with providing free water and education”? He blamed the central government for waiving off bank loans worth Rs 10 lakh crore in the last five years.
Bharatiya Janata Party MP Varun Gandhi also made similar remarks. “The same Parliament that expects the poor to express thanks at receiving five kg grains also says bad loans of Rs 10 lakh crore of corrupt businessmen have been waived in the last five years. Who has the first right over the government treasury?” tweeted Gandhi, citing data shared by the government in the Parliament.
Both Kejriwal and Gandhi compared freebies announced solely for electoral gains with bank loan write-offs. In simple terms, this is a false equivalence.
Freebies and loan waivers are announced by political parties for electoral gains. Loan waivers lead to moral hazard and undermine the credit culture. It leads to situations where borrowers might feel that they could get away without repaying their loans and result in an increase in non-performing assets in the banking system. They also are fiscally irresponsible for the most part since they constrain government spending in productive areas such as building infrastructure.
On the other hand, writing-off loans is an accounting practice that helps banks to clean their balance sheets and avail tax benefits and optimise the capital. Moreover, unlike loan waivers, banks do not forgive the debt when they write off loans and the borrower remains liable to make the repayment. Any recovery the bank makes flows to its profits.
To be sure, the increase in loan write-offs over the last decade highlights struggles of banks with non-performing assets (NPAs) which followed the lending boom of the noughties.
The share of public sector banks — which are owned by the government — in loan write-offs is very high as well, a sign of inefficiency, poor underwriting practices, and a lax credit culture. But that is a different issue from write-offs. The share of state-owned banks in overall write-offs is in line with their share of overall NPAs, as the table shows.
At the end of the day, bad loans remain a burden on the taxpayer who finances the losses and suffers from higher interest rates. But write-offs still can’t be equated with poll freebies that are meant only for electoral gains.
According to a Times of India report, in April this year, in a meeting with PM Modi, top bureaucrats of the country warned that repeated announcements of election freebies could lead to a fiscal crisis in states similar to the one that Sri Lanka is going through right now.
The Supreme Court recently said that an apex body needs to be set up to monitor freebies announced during elections, a suggestion that has been welcomed by the Election Commission.
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