The Hindu Business Line : Loan waiver: Bankers await the fine print

Happy call: A farmer from North Karnataka on a visit to Bangalore is informing his friends about the loan waiver for farmers in Budget 2008-09 on Friday.

Our Bureau

Mumbai, Feb. 29 Whether the Union Finance Minister, Mr P. Chidambaram’s Rs 60,000 crore largesse for the Indian farmer, would leave the banks unscathed depends on the details of the scheme to be formulated for this purpose, say bankers. It is still unclear how the Government will raise the money. All that Mr Chidambaram said was that the Government would take care of banks’ liquidity over a period of three years.

A section of the experts tracking the banking industry feel that the Government may raise the money through a bond programme similar to the one announced for compensating fertiliser and oil companies earlier, they said.

Loan waiver

Bank stocks fell in the wake of the Finance Minister’s announcement but recovered when he clarified that the Government would bear the cost of the loan waiver. The Bankex closed 0.4 per cent up on the BSE.

According to Mr K. Ramakrishnan, Chairman and Managing Director, Andhra Bank, this move will not hit the profits of banks.

“As the money will come from the Government, banks will not lose a single penny. This will benefit banks, as the loans will be off our books. The outstanding that the borrower has to pay will now be paid by the Government,” he said.

Explaining why this move will not affect banks, another official from a public sector bank said that if the defaulter is a chronic defaulter, then it is most likely that banks have already made provision. If they have not, now the Government will make the provision.

‘Populist measure’

Mr Ajay Bagga, CEO, Lotus India Asset Management Company, said that this is a populist measure with an eye on early elections.

“It represents a write off of nearly 4 per cent of outstanding bank loans and 25 per cent of outstanding agricultural credit.

Since this money has already been consumed, it will not create any fresh purchasing power immediately, though over time, the principal and interest servicing payments will flow into consumption,” he said.

Mr S. Venkatramanan, Director, Crisil, felt that there would be no negative impact if there is a reasonable scheme of reimbursement. “In fact there would be a marginally positive impact because these loans may otherwise turn into unrecoverable or illiquid NPAs,” he said.

While it will not affect the credit ratings of banks, it does create an element of negative credit culture, which is not a good thing.

Mr Viren Mehta, Partner, Financial Services, Ernst & Young, said: “The aggregate profits of all scheduled commercial banks in India for FY2005-06 and FY2006-07 was in the range Rs 24,000 crore and Rs 31,000 crore, respectively.

Therefore, it should be considered as a foregone conclusion that the Government will provide support for the debt relief.

Whether this is in terms of hard cash or some other mechanism and over what period would the support be provided is something that requires clarity.”

For the fiscal 2008-09, a provision of Rs 16,000 crore has been made for continuing with the interest subsidy for short-term crop loans.

The target for agriculture loans for 2008-09 has been set at Rs 2.8 lakh crore.

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