Banks lending in rural India is a great thing to have happened. Most people who borrow are genuine  -but there are some politically supported borrowers too.

The main reason why a person in India (or in any part of the world too!) repays the loan is ‘because it is the right thing to do’. This is an amazing story told to me by a PSU bank’s top executive. It was a sultry after noon when a lady walked in with a bag of small coins and notes. She wanted to repay a loan which her late husband had taken.

On checking the manager found that her husband had taken a loan of Rs. 1200 and along with interest he owed the bank Rs. 2000. The bank manager saw her condition and said “it is within my powers to waive it, so please treat this as waived”. She had actually collected cow-dung made it into fuel cakes and sold them. Moved the manager made this offer.

She replied “While dying my husband told me he had borrowed money and I should repay it. He also said if this loan is not repaid I will not be in peace.” The bag had more than Rs. 2400 – the manager returned her the balance. He says in his rural stint he really met genuine people. He also presided over the bank NPAs where he found at least one industrialist who was defaulting even on his electricity bills – and had a Central level minister push BEST not to cut electricity to his office. Of course even during this period he was using his personal helicopter….

Now when the government does a loan waiver I do not know how the people who repaid honestly feel. Will they not at some time decide not to repay the borrowings. Will their ‘financial advisers’ not ‘advise’ them “wait for a waiver”. That is the moral hazard in a bank loan waiver. I was wild and screaming when the loan waiver to the Indian farmer was announced – but I think it was far, far, far more moral than paying billions of dollars for saving jobs in Goldman Sachs and other banks. Talking of Goldman Sachs – they saved at least US $ 15 billion which AIG owed them thanks to the AIG bailout, but now they are thumbing their nose to Uncle Sam! Talk of cheek, man! Ruthlessness of a banker…what say?