The Hindu Business Line : A new Chaudhary from Harvard via Rae Bareilly?

RBI data confirm that the non-performing farm loans in commercial banks amount to just Rs 7,367 crore! Further, the issue is not liquidity. It is solvency. The quick-fix explanation that does not fit is another clue to the desperate decision that had to be taken in the last days without the due care needed to deal with the trust funds of banks. Three clues indicate that the debt write-off was a desperate interpolation in the Budget speech.

S. Gurumurthy

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In all his earlier Budgets, the Finance Minister, Mr P. Chidambaram, had carefully nursed the Sensex as the external brand ambassador to make the world look at India with favour. But this time around he had to hunt for a brand ambassador for his party in distress.

With elections round the corner, he had to turn to the rustic Indian farmer, an unlikely companion for a sophisticated finance minister, as the internal brand ambassador to canvass for votes in crores at one go. Not that he had given up on the Sensex but, despite enticing tax cuts, he has failed to carry his natural allies with him. Result, the Sensex has let him down this time. But hopefully the farmer may not.

The farm loan waiver of Rs 60,000 crore was at the heart of Mr Chidambaram’s oration on February 29. But the heart of his speech is nowhere to be found in the body of his Budget. The expenditure budget did not contain reference to the elephantine debt waiver, even in small print, as it does in the case of the oil and fertiliser deficit of Rs 18,757 crore kept out of the Budget.

The waiver, the Minister told Parliament: “Having carefully weighed the pros and cons of debt waiver and having taken into account the resource position, I place before the house scheme of debt waiver and debt relief for the farmers.” Farmers who defaulted on their dues up to December 31, 2007 and did not pay up till the date of the Budget become eligible. An honest farmer who paid his dues regularly must be kicking himself for being so honest and the one who paid the December 2007 dues on the morning hours on February 29 must have had heartache!

There is, admittedly, no budgetary support for the write-off. Yet the minister asks Parliament to support the write off of Rs 60,000 crore of bank money, which represents public savings — something over which Parliament has no control.

Three clues

When a nation stunned by his ‘momentous’ decision asked the Finance Minister from where the banks would find the money to book the write-off, he said something to this effect: “The Rs 60,000 crore given by the banks to the farmers may or may not come back to the banking system; part of it may come back. We will provide liquidity to the banks equivalent to the write-off over the period of about three years, during which they would have recovered the amount of Rs 60,000 crore.”

Obviously, the otherwise intelligent Finance Minister has slipped here, and slipped badly. He can be proved wrong on accounting as well as facts. Authentic data from the RBI confirm that the non performing farm loans in commercial banks is Rs 7,367 crore only!

Further, the issue is not liquidity. It is solvency. More. Three clues indicate that the debt write-off decision was a desperate one, and a later interpolation in the Budget speech that had been readied.

All that was needed and done was to add a para, Para 73, to the speech, as the write-off had nothing to do with the Budget as such. See the three interesting clues.

First, in his 2006-07 Budget oration, the minister had referred to the Dr Radhakrishna group report recommendations and assured Parliament that he “would act on the report as soon as it is received”, meaning that he would implement the report. The report was submitted in August 2007.

Contrary to the minister’s view that the debt due to the banks kill the farmers, the group says that it is the farmers’ debt obligations to private money-lenders, not the bank dues, that kill them. The group found that 36 per cent of the private farm loans are taken at 20-25 per cent interest, and 38 per cent of the loans at above 36 per cent interest. More. The panel also found that small farmers, who account for 80 per cent of the indebted, depend more (50 per cent) on private lenders.

The panel had called for the involvement of the Panchayat Raj institutions and farmers collectives to negotiate with the private lenders to settle the debts. It had also commended a debt redemption fund and one-time term loan to the farmers to help them to pay off the exploitative private loans. So the concern was about private, and not bank, loans.

The group had also criticised the design and implementation of the Rs 20,000-crore relief package of the Prime Minister for 31 districts, saying it should cover 100 distressed districts. In its mid-term review (October 2007), the RBI constituted a working group to examine the panel’s suggestions and submit its views by December 2007, after consulting all stakeholders.

The Minister’s assurance to the House was being followed up by RBI. So, till December 2007 at least, there could be no proposal for write-off.

The Radhakrishna group has actually zeroed in on the true evil — private lending — as the villain. The write-off of bank loans was nowhere in the minds of any one as year 2008 turned.

Afterthought

Second, the clue within the Minister’s Budget speech is the most indicative. In paras 10 and 56 of his speech, the Minister says that agricultural credit will top Rs 2,40,000 crore in March 2008, exceeding the target of Rs 2,25,000 crore; for the year 2008-09, he set a target of Rs 2,80,000.

When the Finance Minister was writing paras 10 and para 56, obviously the write-off mentioned in them was nowhere in contemplation. It was obviously an interpolation on afterthought. Here is the maths that proves it. The figures of Rs 2,40,000 crore for 2007-08 and Rs 2,80,000 crore for 2008-09, include the amount of Rs 60,000 crore fated for write-off now as outstanding loans — thus, the minister had included the amount of Rs 60,000 as outstanding and due loan a year from now. So, the decision to write it off in June 2008 is clearly a later interpolation in the Budget speech.

But when could the afterthought have germinated? Here is the clue. Reports say that, on February 20, the Minister was on the dais with Mrs Sonia Gandhi, Mr Rahul Gandhi and Mr Murali Deora in Rae Bareilly, addressing a farmer’s rally. Mrs Gandhi asked the Minister in front of the farmers “to keep the hardships faced by (among others) farmers in mind while preparing his Budget”.

Agreeing with her, the Minister told the farmers gathered there that the banks “are not doing a favour when they lend money to you” and added, the banks “are discharging their duty, when they are lending the money”.

When the Minister reminded the banks of their duty to lend, it would be unfair to assume he was insidiously planning to tell them later that it was their duty to write off what they had lent!

Yet, it is possible that the decision was taken at the Rae Bareilly rally of farmers, not in North Block. Internal and external clues indicate that the waiver decision was taken after paras 10 and 56 of the Finance Minister’s speech had been readied.

Loan record

The cynical part of the momentous decision is that the deadly disease that kills the farmers, according to the Dr Radhakrishna group, is not the debt they owe to banks, which are now being written off criminally, but criminal private loans. A decisive government can enact simple laws to bar private lenders from recovering the usurious interest; no court will strike it down in the light of the findings.

In contrast, farmers’ loan record with the lending commercial banks seems commendable. According to the latest RBI Report on Trend and Progress of Banking in India 2006-07 (pg 96), the gross NPA of all commercial banks put together was Rs 50,519 crore, of which the share of NPAs on farmers loans was only Rs 7,367 crore. This is the gross figure, the net must be far less. That is, out of the farm loans of Rs 2,30,180 crore outstanding, the gross NPA is Rs 7,367 crore.

In the face of this authentic truth, the Finance Minister tells the nation that the Rs 60,000 crore he is compelling the banks to write off entirely constitutes NPA, which may not come back!

More. The minister says “the debt waiver means that I have to provide equivalent liquidity to the banking system”.

The Finance Minister is too intelligent not to know that the write-off is a balance sheet issue that invites capital adequacy problems. The net owned funds of scheduled commercial banks as on March 31, 2007 stood at Rs 2,19,174 crore. The write-off would knock off Rs 60,000 crore from this number and bring it down to Rs 1,59,000 crore, undermining capital adequacy.

It is thus no liquidity issue, but an issue of solvency. The quick-fix explanation that does not fit is another clue to the desperate decision that had to be taken in the last days without the due care needed to deal with the trust funds of banks. QED: A new Chaudhary Charan Singh is born from Harvard via Rae Bareilly!

(The author is a corporate advisor. His e-mail is guru@gurumurthy.net)