It’s time we had a sound but politically attractive loan-waiver scheme

Economists and domain experts are quick to rubbish both government loan-waiver schemes as well as promises made by opposition parties. However, such a critique or logic is unlikely to be the guiding principle when political manifestos are drawn up. This, then, is the price of electoral democracy.

Loan waivers are appropriately denounced on several counts — they only provide relief to defaulters and deter people who are willing or have repaid loans, create a moral hazard and jeopardise farm-credit systems, benefit only the formal sector and not poor households that rely on informal debt, are not fiscally sound, are announced as doles based on electoral prospects rather than on genuine distress, and, limit the borrower’s ability to access the next round of credit.

However, given the political and electoral appeal of such loan waivers, the above logic is unlikely to deter political parties from continuing to make such announcements or promises.

Can the loan waiver scheme therefore be better and more soundly designed and yet retain its popular appeal?

Write-offs

A large percentage of farm households find it difficult to service farm loans. Conservatively, crop loans disbursed by banks and cooperatives have been seeing NPAs in excess of 20-30 per cent in many cases. These are in any case being provided for over a period of time in the balance sheets of the financial institutions.

In other words, significant amount of write offs on such loans is already taking place quite apart from the government loan waivers.

Is there any way of improving loan repayment compliance, providing tangible relief, minimising the negatives of loan waivers and yet retaining the political and popular appeal of the scheme? Interest rate subventions do provide relief and are in existence across central and State government schemes. However, these have been in vogue for some time, have lost their “newness” and popular appeal and are taken for granted.

Perhaps, the only way of doing this is to have a scheme that incentivises loan repayment and yet provides significant and visible relief to the borrower. The scheme will need to state that waivers would be applicable only to those that have repaid a pre-determined portion of the principal, say, 50 per cent. The government could then announce, say, the loan waiver of ₹50,000 on the balance loan outstanding.

Higher loan waivers could be announced for loans against all productive assets such as farm equipment, tractors, sprinkler irrigation, tube wells etc.

Manifold benefits

This redesign of the loan waiver scheme has significant benefits. The government could, for example, announce a ₹40,000 loan waiver for all farmers who have repaid 50 per cent of their crop loans. Loans against productive farm assets could carry higher waivers, say ₹60, 000. In fact, borrowers who make full repayment could also be given an incentive of, say, ₹20,000. Such a promise would retain much of the electoral appeal of traditional loan-waiver schemes.

Secondly, it would, to the extent of the loan waivers, directly improve the balance sheet of the lending entity without treating such borrowers as defaulters.

Third, it would address several drawbacks of the standard loan-waiver. Fourth, such loan waivers would be more in the nature of a “back ended subsidy” rather than a “write off”. Such subsidies are already provided for in respect of several infrastructure lending projects and would not favour a defaulter vis a vis a borrower who repays.

Finally, the design of the scheme incentivises lending for productive assets against standard consumption or crop loans.

The writer is MD & CEO of NCML.

The views are personal.

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