The Hindu Business Line : Mechanics of farm loan waiver

In 2007-08, gross domestic product (GDP) is estimated to grow at 8.7 per cent and agriculture (which accounts for 17.5 per cent of GDP) a mere 2.6 per cent. While growth of agricultural credit is all set to exceed the 2007-08 target, credit in 2008-09 is pegged at Rs 2,80,000 crore.

Budget 2008 has announced a Rs 60,000-crore debt wavier scheme for farmers. The scheme envisages complete waiver of all loans of marginal and small farmers that were due as on December 31, 2007, and remained unpaid until February 29, 2008.

For other farmers, a one-time settlement (OTS) scheme has been announced wherein outstanding loans which were due as on December 31, 2007, but remained unpaid till February 29, 2008, can be settled at a rebate of 25 per cent against the balance payment of 75 per cent.

Whither the resources?

Not only this, once such loans are settled or waived, the same farmers would still be eligible for fresh loans from banks.

This will result in about three crore small or marginal farmers getting relieved and another about one crore farmers getting settlement. All this is expected to be over by June 30, 2008. The scheme will have a direct bearing on the bottom-line of scheduled commercial banks, regional rural banks and cooperative credit institutions.

So far as the Government in concerned, the Rs 60,000 crore burden has not been provided for in the Budget, meaning that it will have to be funded by future tax collections. From where the resources will come is still not clear. Such a huge amount can neither be left to be recouped under the head, ‘contingencies’ nor left without being provided for. If that be the case, it would mean that either the respective banks or the taxpayers will have to take the hit

In public sector banks (PSBs), non-performing assets (NPAs) as regards the agricultural sector stand frozen now (cut off is February 29, 2008), as banks will have to write off their advance/lending portfolio to that extent. The actual figure could be even more than Rs 60,000 crore.

What banks will gain is the cleaning up of the messy agricultural loan portfolio. Now such loans will be out of the books and banks, in turn, will be provided with liquidity. In what form the liquidity will be is not yet clear. Will it be a simple reimbursement, a form of subsidy or some other financial package will be known in April. Ideally, this should be made known immediately as only then banks can decide whether to book such waivers and OTS in 2007-08 or 2008-09 (before June 30).

Type of liquidity

If the banks get liquidity in the form of bonds, it could be considered as fresh tier II capital. What would effectively happen is that on the liabilities side of the balance-sheet the capital would be shown, and assets (NPAs) will get replaced by investments in the form of bonds on the asset side. For banks, these amounts were already NPAs and had either been or would eventually be written off in the books by charge to profit and loss (P&L) account. In any case, liquidity was never a case as these were dead loans with virtually nil chances of recovery. It is expected that banks will be compensated as and when loans fall due.

Depending on how the scheme is framed by the Government, banks will account for the same.

In case the banks have already provided for such loans as bad/doubtful/sub-standard assets, they will gain to the extent the provision is reversed as a result of recovery/waiver under the scheme.

If no such provision exists, the banks will only get rid of such NPAs and their books will be cleaned up. If the Government reimburses this NPA amount, the banks will merely set off these advances against the funds so received from the Government. But if the Government decides to provide liquidity by issuance of bonds, the banks’ assets will get substituted, that is, NPAs will go out of the balance sheet and bonds would be shown as investment. Any interest earned on such bonds could then be accounted as income by banks.

Despite the huge waiver, the small farmer could continue to reel in debt as formal credit is only a fraction of the total credit. Overall, therefore, it is felt that banks may not have much to lose. But once they start afresh, they will start creating NPAs again as such borrowers are eligible for fresh loans.

(The author, a chartered accountant, is an independent director in a public sector bank.)

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