The Hindu Business Line : Farm loan waivers: The figures don’t add up

While the malady of the farm sector lies in non-institutional credit
at usurious rates of interest, the remedy announced is waiver of institutional credit.

B. Yerram Raju

The Finance Minister, Mr P. Chidambaram, has put the financial sector at risk by announcing loan waiver for farmers.

To tackle the slow growth of the farm sector and the distress faced by the farmers, the Expert Group on Agricultural Indebtedness and the M. S. Swaminathan Committee on National Farm Policy recommended an integrated set of measures. All these were set aside as temporary palliatives for a no-holds-barred election Budget.

The Economic Survey has been consigned to the cupboards of the economists. And reforms have been archived. Then what is there to cheer about, one may wonder. Will the Budget bring in the votes to retain the UPA in power?

Poor delivery mechanism

The Economic Surveys over the years have failed to acknowledge that weak foundations and strong fundamentals cannot coexist. In this year’s Survey, the strong fundamentals — of 9.6 per cent growth, backed by more than 12 per cent growth in the manufacturing sector — repeatedly referred to have not had the required effect because of the weak delivery mechanism. Year after year, schemes for the farm, rural development and social welfare sectors have failed because of glitches in the delivery system.

Empowering farmers

The malady of the farm sector lies in non-institutional credit at usurious rates of interest, but the remedy announced is the waiver of institutional credit.

This is naturally to please the gallery and put the moneylenders or the informal lending system on a firm footing.

After all, it would not be right for the Finance Minister to ask banks to lend, only to announce a waiver at a later date.

Knowing that the loans would be waived, the farmers may not see to need to repay. However, if they had enough cash in their hands, they would have come out of the debt trap.

The Market Intervention or the Price Stabilisation mechanism, suggested by the Radhakrishna Committee, and the strengthening of the insurance mechanism would have offered a permanent solution. The public and private sector banks had, in their agricultural non-performing assets portfolio, Rs 7,978 crore (Trend & Progress of Banking in India, RBI, 2006-07). As of December 2007, the NPAs are estimated to be around Rs 9,800 crore; for rural cooperative banks these amount to Rs 10,200 crore.

The proposed Rs 60,000-crore waiver is, ab initio, a measure that may not benefit the targeted groups.

Puzzling numbers

About three crore farmers are expected to benefit from the waiver, but the number of accounts (not farmers) in public sector banks, as per the RBI’s published data, is just 2.35 crore , of which, small and marginal farmers account for only 78 lakh. This concedes the fact that many more of these farmers would be in the co-operative sector.

Fifty per cent of the farm loans have been disbursed to the southern and western regions and, therefore, the waivers also would be in that proportion. Therefore, it is the UPA-led governments in the South and Maharashtra which will be the main beneficiaries.

Commercial banks, in their anxiety to shore up the capital in relation to the risk-weighted assets, have tried to dress up the NPA figures, projecting low NPAs in the farm sector. They cannot now claim in excess of what they have officially shown.

At the same time, they cannot ward off the declared write-offs of the Government. They would have to, therefore, write off from their own lending portfolio

The net result would be that the claims would be far less than the unclaimed amount, which would help the Finance Minister adhere to the FRBM (Fiscal Responsibility and Budget Management) target at the end of the financial year.

Systemic risk

The financial sector is likely to be exposed to systemic risk. In fact, even in the sub-prime crisis, the bail-out of banks was announced by central banks and not the governments.

The first financial sector reforms committee, headed by Mr Narasimham, felt that the government should not interfere with the working of banks and recommended even winding up of the Department of Banking. Nothing on these lines has happened so far. There has not even been a dilution of the government’s share in the banking sector.

Under pressure

Technicalities aside, would this measure help the vote bank of the Congress? Perhaps not. The Finance Minister probably succumbed to pressure, not just from his own party, but also other parties.

Looking back, the V. P. Singh Government was voted out of power despite resorting to such loan waiver. If the Finance Minister had announced a well-articulated waiver scheme taking into account also private money lending, as the Kerala Government did, , it would have been more effective.

(The author is an SME consultant and Regional Director, PRMIA, Hyderabad Chapter.)