Waivers as the ‘default’ setting

The Tamil Nadu government has once again set the cat among the pigeons by announcing a loan waiver. The latest waiver scheme covers short-term crop loans availed from co-operative institutions. Tamil Nadu Chief Minister Edappadi K Palaniswami, who announced the scheme on February 5, was quick to action it as well, personally doling out the first few waiver certificates to beneficiary farmers last Saturday.

According to the scheme, the waivers, aggregating to ₹12,110.74 crore, which have been availed from cooperative institutions by more than 16.4 lakh farmers, will be waived off in toto – both interest and principal, with no attempt to be made to monetise any collateral provided. Further, the waiver will not discriminate between running loans in good credit order and those already in default.

Palaniswami’s speed off the blocks is understandable — the electoral equations in the State have changed dramatically with the return of VK Sasikala. The decision to go in for another round of loan waivers is also understandable. While the government has advanced the havoc wreaked by the pandemic, as well as two successive cyclones, as the ostensible reason for the write-off, the real reason is not hard to see. Loan waivers have now become a reliable tool for winning the elections. Uttar Pradesh Chief Minister Yogi Adityanath set the ball rolling with his ₹36,000-crore farm loan waiver scheme, followed quickly by copycat schemes in Maharashtra, Tamil Nadu, Andhra Pradesh, Telangana, Madhya Pradesh, Karnataka and elsewhere. And most importantly, the waivers have “worked” — in every case, the party promising the write-off (or, in some cases, the bigger write-off) has ended up winning.

Reliable poll tactic

Between 2014 and now, waivers have been announced 12 times by 11 States (Tamil Nadu is doing it for the second time). Every time, there have been elections in the offing. Clearly, loan waivers have become the “default” setting when it comes to pre-poll promises.

I say “default” because there is enough and more evidence to suggest that leave alone loan waivers, even the expectation of loan waivers significantly alters the credit behaviour of borrowers — for the worse. Back in 2017, addressing the question of the rising tide of loan write-offs announced by various states, the then RBI Governor Urjit Patel warned: “It undermines honest credit culture, it impacts credit discipline, and it plugs incentives for future borrowers to repay. In other words, waivers engender moral hazard.”

Former SBI chairman Arundhati Bhattacharyya had said, “there is always a fall in credit discipline because the people who get the waivers have expectations of future waivers as well.”

This, in a nutshell, sums up the dilemma of loan waivers. While it is an attractive instrument for politicians, promising quick and immediate returns in the form of votes against future pain for following governments, it becomes akin to grabbing a tiger by the tail. Once caught hold of, it becomes difficult to let go off. The gap between successive waivers becomes inevitably shorter, as pressure mounts from sections who have missed out on the largesse, or another election comes around.

There is also research evidence to suggest that far from freeing agricultural households from debt and freeing up capital for productive investments, waiver cash is treated as windfall gain and used largely to finance consumption households. In an empirical study of beneficiary and non-beneficiary households in UP of a 2011 debt waiver scheme, researchers Tanika Chakraborty of IIM-C and Aarti Gupta of IIT-K found that beneficiary households increased their consumption expenditure by an average of ₹8,000 post-waiver, and significantly, most of the expenditure was on social events like weddings.

An RBI occasional paper which looked into the impact of Tamil Nadu’s 2016 scheme found that on time repayment of overall agricultural loans dropped sharply post waiver.

Delayed reimbursement from the government to the lenders reduced the fund availability for fresh loans. Credit availability in areas where waiver claims were high dropped post-waiver, and there were a host of new borrowers who took credit after the waiver announcement, in anticipation of a future write off.

Of course, the argument used for the write-offs is that such waivers are routinely given to the corporate sector, in the form of loan restructuring, where it is the lender who ends up taking the haircut. Evidence from other sectors tends to suggest the same thing. A waiver or write-off of any kind addresses the ‘stock’ problem — the current accumulated loans or bad debts, but not the “flow”, that is, future build up of similar debts.

The UDAY experience

The electricity sector, and the government’s attempt to rejuvenate the moribund discoms with the UDAY scheme, by writing off some of their debt and restructuring the rest, did not as anticipated, lead to more efficient performance by the discoms, or greater investments in infrastructure. The scheme would have worked only if State governments had followed this up with serious attempts at reducing subsidies and pricing all consumers fairly, instead of soaking a few to subsidise others for political reasons.

This did not happen and the defaults have already started in the restructured debts of discoms, because the elected governments which controlled the discoms found it politically easy to accept the restructuring and taking on half the debt of the discoms (which burden will have to be borne by future governments), but found it politically difficult to address the subsidy question.

That same cycle is now becoming embedded in agricultural loans as well. Addressing the real issue facing farmers — that of ensuring an adequate livelihood — is a huge challenge, both economically and politically. Simply creating the eco-system for a market driven solution — as the BJP government at the Centre had hoped for with its farm laws — has run into huge political opposition, because beneficiary farmers are not prepared to accept the potential of higher, market-driven prices against the surety of MSP and government-led procurement.

Till political dispensations develop the wisdom to take the long view, or regulators and officials the backbone to resist purely political moves, the cycle of loans, defaults and waivers appears to be set on endless repeat.

The writer is former Editor of BusinessLine

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