Prasanna Tantri, an economist and professor at the Indian School of Business (ISB), has raised serious concerns about India’s credit system and the government’s push to merge smaller banks into larger entities. Speaking on a podcast hosted by PG Radio, Tantri warned that these measures could negatively impact credit availability and hinder entrepreneurship across the country.
Credit Accessibility Challenges
While acknowledging the government’s success in improving access to savings, Tantri highlighted a glaring gap in addressing access to credit. “The Modi government solved access to savings — but they have not been able to solve access to credit. These two are very different,” he said.
Tantri explained that the dynamics of trust in lending differ significantly from saving. “Access to savings is simpler because the saver has to trust the bank. That’s easy because people trust the government and banks. But access to credit is the reverse — the bank has to trust the borrower. You can’t achieve this through schemes like Mudra loans,” he stated.
Concerns Over Bank Mergers
Tantri expressed his disapproval of the government’s strategy of merging smaller banks to create larger ones, like the State Bank of India (SBI). He argued that large banks are less equipped to meet the unique needs of small businesses. “A large monolithic bank like SBI will not invest time in understanding small businesses and their cash flows. We need smaller, specialized banks that can lend based on cash flow rather than collateral,” he explained.
He stressed the importance of relationship banking, where lenders build trust with borrowers by analyzing their business cash flows instead of relying solely on collateral. “Smaller lenders are better positioned to understand borrowers and provide cash flow-based lending,” Tantri said.
Criticism of Government Schemes
The ISB professor was critical of large-scale government credit schemes, particularly the Mudra loan initiative. He questioned their efficiency and long-term viability. “Credit does not work through government-sponsored schemes. Bankers will find ways to evergreen the loans, and that won’t solve the problem,” he said.
Flawed Collateral Valuation
Tantri also pointed out systemic flaws in the way collateral is valued in India’s banking system. He criticized the assumption that collateral guarantees loan safety. “People think giving Rs 100 as security and Rs 80 as a loan is safe. But in case of default, that Rs 100 collateral often sells for Rs 50 or 40. It’s not as secure as it appears,” he remarked.
Impact of NBFC Closures
He further raised concerns about the government’s policies toward Non-Banking Financial Companies (NBFCs), many of which have faced closures. “We’re shutting down NBFCs and merging banks, making them larger. This reduces access to credit for small businesses and individuals,” he added.
Call for Reform
Tantri warned that the current approach to credit could have long-term consequences for India’s economic growth and innovation. “If we don’t improve our credit infrastructure, we will stifle growth and create monopolies. Entrepreneurship needs easy access to credit to thrive,” he concluded.
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