The Hindu Business Line : Issues ignored by waiver package

Substantial portion of credit has been taken at high cost from moneylenders, and it is this which is creating distress amongst the farming community.

S. Venkitaramanan

The Budget for 2008-09 has been under attack by various political parties, some of whom have felt that Mr P. Chidambaram has stolen their thunder by announcing debt relief to farmers. The Finance Minister has met this criticism head on by asking them to declare boldly whether they would oppose the scheme. The Minister has made a debating point and carried the day so far as the public debate is concerned. But there remain some nagging questions as to the rights and wrongs of the debt-relief package.

Moral hazard

First comes the moral hazard point that those who have complied with their obligation for paying their dues in time may find themselves on the wrong foot because they would be denied the relief. To this, the Finance Minister has an answer that this kind of things happens even for one-time settlement in the corporate sector and nobody objects. There is some merit in his argument. Whenever a bailout is organised, those who comply with the laws and are denied the bailout have reason to feel aggrieved at their bad luck.

As to the question of how the Finance Minister would meet the resources required, his answer is that he would supply adequate liquidity to the banks in need. After all, the dimension of the liquidity relief could be spread out over three years. But this answer of the Finance Minister begs the question as to how he would find the resources for funding the liquidity gap. Would it be by way of a grant or by way of special bonds? These are issues, which the Finance Minister has left unanswered.

NPA worries

There is a more material question of banks facing an increase in their NPAs (non-performing assets) as a result of the “directed” write-off unless they are already provided for or there is a special dispensation that such loans covered under the mandated “write-off” be not included under NPAs.

Such a dispensation by the RBI would be contrary to all financial prudence. When the loans are written off, there has to be a supply of resources from the Government either by way of a grant or loan. A loan would mean an increase in liability, which would lead to the banks being equally worse off.

Reputed chartered accountants and lawyers have pointed out that it is not a question of liquidity only but also of banks being solvent. To the extent to which the Government asks banks to write off the loans, there will definitely be a write down in the profitability of the banks. The Rs 60,000 crore may look small compared to the Government’s Budget. But when it comes to individual banks, the implications may be quite different. I hope the Government will consider these aspects before issuing final directions to the banks.

Radhakrishna panel

In his speech and subsequent clarifications, the Finance Minister referred generally to the Radhakrishna panel recommendations. The panel, which had been appointed by the Government to look into the problems of agricultural indebtedness, has not, as Mr Chidambaram himself pointed out, recommended such a waiver.

What the Finance Minister has not mentioned is the fact that the panel has recommended steps towards “formalisation” of non-formal credit of agriculturists which has been taken from money lenders. The panel has recognised that a substantial portion of farmers’ credit has been taken at high cost from moneylenders and it is this which creates the problem leading to distress amongst the farming community.

The Radhakrishna panel has, in fact, recommended that a one-time measure of providing long-term loan by banks to farmers may be considered to enable them repay their debts to the moneylenders. Further, it has recommended that Panchayati Raj institutions, civil society organisations and farmers’ cooperatives should be involved in arriving at a negotiated settlement with moneylenders. This would also help in achieving the objectives of financial inclusion. The modalities of the scheme are left to be worked out by Nabard for early implementation.

In this context, the panel has recommended a “Money Lenders Debt Redemption Fund” to be created with a corpus of Rs 100 crore to begin with. Obviously, this was not as dramatic as the scheme of waiver which the Finance Minister had announced. The panel’s recommendation has, however, the merit which would have tackled the problem of farmers’ indebtedness to moneylenders, which at exorbitant rates, creates hardship.

The Finance Minister has argued in various interviews, post- Budget, that those who are pressing for relief of moneylenders’ dues do not have a clue as to how to determine their magnitude. The Radhakrishna panel has come out with a clear solution to this problem.

Obviously, the non-dramatic recommendation of the panel, viz. to set up a Money Lenders’ Debt Relief Fund, has wilted by the side of the more dramatic, but costly, debt relief scheme, announced by the Finance Minister.

The Kerala precedent

In this context, the Radhakrishna panel has pointed out how the Kerala Government had introduced a Kerala Farmers’ Debt Relief Commission Bill, which aims at affording debt relief to farmers. This Act also provides the constitution of a Commission with adjudicatory, conciliatory and negotiating functions to redress the grievances of farmers who have borrowed from the State-owned institutions and moneylenders. This can recommend appropriate measures for providing relief to indebted farmers. Obviously, there are clear precedents for the Government to follow to handle the moneylender issue.

In spite of the kudos which the Finance Minister has received from various sources, it behoves him to examine and implement the various recommendations of the Radhakrishna panel. It would be an act of bold statesmanship to recognise the merit of the Opposition’s standpoint.

The farmers’ distress cannot be tackled except by bold measures, and the Radhakrishna panel affords a way out. Above all, the panel was set up by the Government and it would only be appropriate that its recommendations are examined and implemented to the extent feasible.

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