Loan waiver blues

rupee

Be prepared for a rash of populism, deepening banks’ woes

Every year, in his budget speech, it is almost a ritual that the finance minister announces a suitable hike in bank credit to the agriculture sector. That is usually accompanied by much desk thumping and cheers among party faithful, smugly satisfied that they have discharged their duties to the farming community. For the current fiscal, that number is ₹10 lakh crore. Neither does the FM offer information in the speech on how much of the previous year’s loans have come back nor does any one ever ask this. It is something that MPs had better start asking, for they are going to have the Government on the mat.

A crisis is brewing thanks to the farm loan waivers that have been announced recently by the Uttar Pradesh and Maharashtra state governments. A total of ₹66,000 crore is the amount that is estimated to be waived off by these two states in response to demands from beleaguered farmers. That is identical to the amount the earlier UPA government at the Centre waived off in 2008 — and reaped the rewards at the hustings in the next year. That lesson is not lost on politicians and we are going to be in for some competitive loan waivers in the next two years.

There are estimates that the amount that may have to be waived could be ₹2.5 lakh crore and more. Even those who may have been able to pay back the loans will now sit tight in anticipation of loan waivers. Such borrower behaviour is typical in these situations. It will be a miracle if the banks can get back even half the money they have lent. If they do, it would probably merit bigger desk thumping in Parliament. For public sector banks, who are already on ‘capital drip infusion’, and struggling with recoveries of loans given to the manufacturing and infrastructure sector, this can only mean very difficult times ahead. Fresh agricultural lending will almost certainly take a hit since it will require very brave branch managers to lend money with the sword of future vigilance enquiries hanging over their head. Any hope of doubling farmer incomes within five years will have to be kissed goodbye for now.

Associate Editor

Published on June 08, 2017

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