Though Prime Minister Narendra Modi’s choice of Uttar Pradesh with its sizeable Dalit population to launch the Stand-up India scheme was clearly dictated by political considerations—the state goes to polls next year—the plan is both well-intentioned and well-designed. Instead of concentrating on the old dole model, the plan is to ensure that 1.25 lakh SC and ST families will get a bank loan of between Rs 10 lakh and Rs 1 crore each year, to help them become entrepreneurs—each bank branch, as it were, is to give one loan each year. Though the Prime Minister’s jibe that the poor give deposits to banks while the rich (like Vijay Mallya) borrow funds and don’t return them was incorrect since the poor don’t contribute to bank deposits in any meaningful way—the Rs 35,000 crore the Prime Minister spoke of as deposits in Jan-Dhan accounts is tiny compared to the overall deposit base of over Rs 80 lakh crore—it is true that the poor need access to bank loans.
Given that the rates of loans turning NPA are higher in the priority sector than they are in industry—in FY15, 5.8% of priority sector loans had turned NPA, versus 5.3% for non-priority sector loans—this is a sure way of adding to NPAs of public sector banks. Two points need to be kept in mind. At even R40 lakh per family, that’s a loan book of R50,000 crore, compared to a total loan book of Rs 72 lakh crore for the banking sector. More important, while the loan is to be refinanced through SIDBI, a credit guarantee fund is to be established to ensure that, should the loan turn bad, banks don’t end up carrying the can for it. How the fund is to be created and serviced is not clear, but even if the government is to fund the premium through the budget, it is money well spent—it is also in keeping with other plans of the government to provide medical and accident/death benefits to the poor, or crop insurance for farmers, by paying all or part of the insurance premium.