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In Focus

February, 20

Why PM Modi imposed Demonetisation: Crippled by bad loans, banks could no longer lend money to PM’s friends

Since 8th November 2016, PM Modi, like a desperate salesman trying to cover up the manufacturing defects in his product, offered many reasons for Demonetisation. From black money and terrorism to counterfeit currency and cashless economy, he dangled carrots of various shapes and sizes before the people. However, the real story lies elsewhere.

In December 2014, seven months after PM Modi took charge, the bad loans of Public Sector Banks stood at Rs 261,843 crore, a worrying amount, but one which could have been tackled by sound and well devised Government policies. This figure has now spiked, alarmingly, to Rs 614,872 crore, a staggering 135% increase in 2 years. If we include Private Banks, this number is close to Rs 7 lakh crore (Rs 697,409 crore).

Why would a Government allow such bad loans or Non-Performing Assets to mount, if not to write them off on the pretext of having a clean balance sheet? In February 2016, the RBI revealed PSU’s had written off Rs 1.14 lakh crore. By December 2016, this figure had risen to 1.54 lakh crore. It appears, the Government was in no mood to chase these defaulters, but was rewarding them for cheating the nation.

The Government called this a ‘technical write-off,’ and said they would still try and collect this money. But, the RBI, in a circular wrote against this practice, saying that when a bank initiated a technical write-off, the incentive to recover the money went down.  

But these write off’s had made banks significantly weaker, and they required compensation if they had to continue giving bad loans to PM Modi’s rich friends. Demonetisation was the only way PM Modi could have infused the banking system with the kind of capital that could offset the bad loans and the write offs. For PM Modi’s model to work well the capital that came in had to be stay in the banking channel. Withdrawals by people would have spoiled the plan. So, the Government imposed restrictions on withdrawal of money.

What a stroke of luck it was for the banks and the profligate businessmen who had borrowed vast amounts of money and failed to repay them when Demonetisation was announced. Fund starved banks got access to cash and businessmen saw the pressure to repay loans become lax. As more money was deposited with the Banks, its coffers swelled.

While the small entrepreneurs or shopkeeper struggled to get credit, PM Modi’s businessmen friends were relieved that their loans had been written off and they could now take fresh loans. Think about how many of the big businessmen were declared ‘Wilful Defaulters.’

PM Modi laughed as people saw their money turn to paper overnight. Laugh he might, for he had once again won the support of those few businessmen who were grumbling that Modi ji’s policies had made the economy stagnant. He has simply taken the money from the poor and given it to the super rich, like a reverse Robin Hood.

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