Saturday, March 25, 2017

Politics and Economics of Crop Loan Waivers

Cost of Crop Loan Waivers

SBI Chairman Arundhati Bhattacharya’s impromptu remarks on loan waiver promises of the States to the farmers have attracted the politicians’ ire. Equity and discipline are two sides of the coin of farm lending. If the Banks maintain equity, and care for lending discipline more, borrower discipline would not take a toll.

Loan waivers announced by the State Governments should be met by the state exchequer and not the centre, Venkayya Naidu, the Union Minister said. But when the BJP announced it, decrying the earlier moves of AP and Telangana Governments, it gained political traction and the states demanded a cake in the bargain from the centre with several like Maharashtra, Tamilnadu, Karnataka joining the chorus. Have farm loans become unviable and farmers untrustworthy borrowers? Are there no alternatives to rescue the farmers’ woes?

Unfortunately, lending discipline is lax. Roll over of crop loan with interest as a new loan (this we call book adjustment) and a small incremental credit for crops that take more loan component than that is actually grown on the field has become the order of the day. In South India, it is jewel loans that get accounted for as crop loans. Otherwise one cannot find an explanation for only 20.9% of crop loans getting insurance cover against the mandatory debit of premium for all the crop loans disbursed.

Some grameen banks are debiting processing fee and inspection charges for crop loans and that too without the borrowers knowing it. On top, they charge interest on those debits if not able to recover them.

Arm chair lending even for farm sector has become the order of the day due to inadequate or lack of field staff. Earlier, controlling authorities and even top management used to visit the adopted villages as a semblance of identifying with rural credit activity. One is hard put to find such visits. These are not wild allegations, but facts that came out during the crop loan waiver evaluation done in Telangana by the Development and Research services private limited.

Farmers did not fail the nation in spite of failure of the monsoons, failure of governments not releasing the promised incentives in time, insurance failing them year after year and markets ditching them on the price front. But bankers failed the farmer and the nation with absolute impunity. Any crop loan target set for them by the government is shown to be achieved.

Earlier Loan write offs of 1990 for Rs.10000cr and Rs.70000cr of 2008 were a political stroke and were criticised for lax implementation by the CAG Audits placed before the Parliament.
Telangana Government waiver scheme covers only institutional crop loan including jewel loans outstanding as on 31st March 2014 up to Rs.1,00,000 per farmer family, spouse and dependent children. It defined eligible short term production loan as loans given for raising crops that are to be repaid within 18months and includes working capital loan for traditional and non-traditional plantation and horticulture. Claims are reimbursed by the Government on the basis of a certificate from the bank that the waived amount has been actually credited into the farmer’s account.
Every lending institution is mandatorily responsible for the correctness and integrity of the list of eligible farmers under the scheme and the particulars of loan waiver in respect of each farmer. All the bankers are expected to provide fresh loans as the existing liability up to Rs.1lakh per farmer family has been picked up by the state government under the scheme.

Evaluation exercise revealed that the farmers to the extent of 70% are happy with the reprieve given to them particularly because they were affected by severe drought for two years in a row although they were unhappy that the waiver instalments were released late leading to delay in release of fresh crop loans by the banks. Fresh crop loans were inordinately delayed in 60 to 70 percent cases during 2014.They wished that the state government would have released in one single go the announced benefit.

55.5% was the share of the crop sector in the total agriculture loans. Government of Telangana agreed for writing off crop loans to an extent of Rs. 16,160crores constituting 76.19% and gave detailed instructions to the banks after consulting the SLBC.
The State having more than 80 percent of small and marginal farmers with loans from multiple institutions and also from private lenders and traders faced problems in addressing the competing demands on the claims for waiver.

Banks’ loan books and farmers’ land record passbooks proved equally non-transparent. Borrowers as well as their parents with identical names figuring in different banks posed impregnable identification issues requiring over six months for resolution at the sub-district level before the first instalment was released.

Average loan amount subject to waiver was a little less than Rs.55000 per farmer family against the announced Rs.1lakh.
Major Public Sector Banks had gross NPAs in Short term crop loans of the order of 2.4% in 2016 as against nearly 8% in 2015.

DRS study came to the conclusion that loan waivers are not a permanent solution to the recurring problems of the farmers either due to man-made or natural calamities.

Solution lies in appropriate insurance mechanisms with individual farmers and income insurance as focus and not the crop insurance that takes threshold limits of crop yields based on area affected historically.

South Korea that supports agriculture sector ranking top among the world’s highest subsidy providers, offers excellent example in this direction.

Korean farmers also get the benefit of a comprehensive agricultural insurance scheme managed by the National Agricultural Cooperative Federation (NACF) with reinsurance support on a quota share basis from a group of domestic reinsurers. The government supports the scheme in four different ways i) provides 50 percent premium subsidies for crops and livestock; ii) acts as a reinsurer of last resort for the liability in excess of 180 percent local market loss ratio;(iii) 100 percent of the NACF’s crop insurance operational expenses and 50 percent of livestock insurance operational expenses are subsidized by federal government budget; and (iv) It participates in product research and development. The insurance coverage in Korea is voluntary.

It will be worthwhile investment on the part of government both in terms of time and resources to provide sustainable income insurance to the farmers on a pan India platform on similar lines, so that the recurring demand for the loan write offs can be warded off.
*The author is an economist and risk management  specialist and part of the DRS Study Team.

Tuesday, March 21, 2017

Pre-merger SBI on the verge of bankruptcy?

Customers of State Bank of India (SBI), especially in south India, are forced to ask whether SBI is headed for bankruptcy as they find 99% of the automatic teller machines (ATMs) shut down and all branches declining withdrawals from the depositors’ savings account beyond a limit. Bank branches are refusing to honour cheques drawn on them, either their own or on third party, in spite of sufficient balance in the account. To top it, the bank’s branches refuse to give written objection for returning the cheque across the counter.  

In February, SBI, in a regulatory filing had stated, “…the entire undertaking of State Bank of Bikaner & Jaipur (SBBJ), State Bank of Mysore (SBM), State Bank of Travancore (SBT), State Bank of Patiala (SBP) and State Bank of Hyderabad (SBH) shall stand transferred to and vested in the State Bank of India from 1 April 2017.”

What does the rule-book say? Is it because of systemic failure or management failure? Does the blame rest with the SBI, or with the Reserve Bank of India (RBI) as well, as it has been a silent spectator for the last 15 days? Just last week, when Bandaru Dattatreya, the Union Minister for Labour, approached the RBI’s office at  Hyderabad, the central bank said that it has pumped in Rs1,170 crore worth of currency into the system, with half of it in the ATMs of banks and the rest to the bank branches.

Section 5 (c) of the Banking Regulation Act, 1949 defines a banking company as any company that transacts ‘banking business’ in India. 

The Act clarifies, in clause (b) of the same section, that the expression ‘banking’ found in the definition should mean accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheques, drafts, order or otherwise. To constitute the business of banking today, the banker must also undertake to pay cheques drawn upon himself (the banker) by his customers in favour of third parties up to the amount standing to their credit in their ‘current accounts’, and to collect cheques for his customers and credit the proceeds to their current accounts. Lending by itself does not constitute banking business, clarifies ML Tannan. 

A recall to all this became necessary, for the banks, even of the ilk of the SBI, seem to have forgotten the basics of banking. Yesterday I paid a carpenter for the work done at my house, by way of a ‘bearer’ cheque drawn on my savings bank account, Rs13,750, which was presented at the counter. The official at the counter and the accountant refused to pay the amount, saying that they can pay cash only up to Rs5,000 as they do not have enough cash. This is not a solitary instance. During the last fortnight, many customers faced this situation. Many members of the Resident Welfare Association, Kalyanapuri, Hyderabad, brought up this issue and demanded its resolution.

The payee asked for written objection, which the bank officials refused to provide. The cheque was otherwise in order in all respects – with proper date, proper signature, with no difference between words and figures and on top of all adequate balance in the account.  Negotiable Instrument Act requires that if a cheque or Bill of Exchange, is returned either on the counter or in clearing, an objection memo duly signed by the authorised official of the bank shall be provided with relevant reason.

In case a bank branch declines to honour the cheque in writing for want of cash in its vaults it would amount to the bank going bankrupt. In the case of SBI it is also the Agent of Reserve Bank of India and operates currency chest at number of branches. Whenever one branch falls short of the cash, the Bank is supposed to make arrangement for filling the vault with the required quantum depending on the needs of the branch. The transaction between the branches on such count can form internal cash management of the bank and only information to the RBI is adequate.

Contrary to this entire practice if the bank chooses to tell its customers that since there are not enough deposits coming into its vault and is therefore restricting payments to its customers withdrawals up to whatever limit it decides surely amounts to sheer mismanagement and frustrates the customers.

Since the bank is shutting off the ATMs and refusing to pay cash either in full or in part, the customers seem to have stopped depositing cash into their accounts and preferred to keep cash for the rainy day and meeting their essential cash requirements. This sets the vicious circle into play.

Whenever creditors’ demands are not met and assets do not support liabilities of a bank, that bank is said to be on the verge of bankruptcy. But by statute, the SBI cannot go into liquidation at its will.

Customers are losing faith in the banks with which they have been transacting for decades!! Bad banking and good economy can never co-exist. Let not SBI declare bankruptcy ahead of its merger.

Saturday, January 28, 2017

Budget 2017 for MSMEs

MSMEs and the Union Budget 2017

This is the time of expectations amidst the gloom of demonetisation. MSMEs hit worst in post demonetisation are looking eagerly to the FM for careful crafting of fiscal policy to boost the morale of MSMEs, particularly those in the manufacturing sector.

Banks have almost shut their doors to the manufacturing micro and small enterprises by biting their teeth strong through the recently amended SAFRAESI Act provisions. Their courage melts in the case of corporate defaulters. Large corporate defaulters cast a shadow of default on their vendors in the small sector and the banks are unwilling to buy this argument though the NPAs in the small industry segment is not significant compared to their elder brothers.

MSME Credit Supply Shrinks

Commercial Banks proved sweet nothings in their offerings to the MSEs while a myriad of their loan products focused on medium enterprises or the mid-corporate sector. 

Manufacturing MSEs going by RBI November 2016 data reveals that they share 42.9% outstanding credit with a negative growth of 9.2%. Manufacturing sector was the largest employer providing employment to 30.3 million (23.1%) persons, 78.9% of whom are in proprietary enterprises – mostly MSEs (Sixth Economic Census). Notwithstanding Jan Dhan, financial inclusion viewed in this prism is yet to gain colours.

Demonetisation only added further woes upsetting the credit supply to the MSEs as acknowledged by all the Industry Associations and grudgingly by the banks. It is time to see what is in store for the micro and small enterprise sector in the coming year’s budget.  
Innovation holds the key for inclusive entrepreneurship. If ‘Make in India’ were to succeed it should happen in rural India as well. In several States rural entrepreneurship is very backward mainly because of the following reasons:

Land, the key input has become scarce and is highly overvalued for any rural enterprise to access. Affordability distances the enterprise set-up. The entrepreneur cannot access the needed infrastructure with full compliance to regulations because he is ignorant of the latter. He realizes the cost of compliance is going to exceed the cost of avoidance.

Start-up MSMEs find it almost impossible to invest in land because of its prohibitive cost. Building rural industrial townships by the States with the required infrastructure like, safe drinking water, industrial water, electricity, packaging, testing and branding or co-branding facilities, multi-storied residential complexes for the workers on lease basis with industry participation, primary and upper primary schools, crèches, play grounds and cultural spaces would be the best alternative to boost this sector. Fiscal incentives like income tax exemption for a five year period for investments in such infrastructure would be in order.

Saturday, December 24, 2016

The Demon of Demonetisation

In recent RBI history, some highlights: smooth transition to Basel regulations and efficient monetary policy under Bimal Jalan and Rangarajan, global aplomb post-recession under YV Reddy, preventing hyperinflation by Subbarao and taming of the NPAs by Raghuram Rajan. These achievements have put the RBI in prime position among central banks of the world. But the utter lack of planning and monumental mismanagement post-demonetisation by the same institution have tarnished its image.  

Banking operations other than currency operations in the country have almost come to a halt, barring exceptions. Credit is on a downturn. All the rating agencies, including Nomura, have down-rated the economic growth. The road to recovery sans GST is going to be difficult.

Wednesday, December 21, 2016

Asking the Right Questions on Demonetisation

This is what many in the country – both economists and non-economists – are doing. Strange indeed that fiction should overtake facts when an eminent economist and a popular columnist, Bibek Debroy chose to counter Manmohan Singh-likes that are just handful in the country in a column in the Hindu dated 12th December, '16. The fact is that majority of the population were in support of demonetisation. I demanded for it even in 2011 for three reasons that the PM mentioned. There was one more reason at that time – to contain inflation that was razing at 8.5% then.The fiction is that 98.7% of households have bank accounts that too with the proportions mentioned by him.

Wednesday, December 14, 2016

The Doyen Among Journalists No More

To imagine that V. Hanumantha Rao (Vihari) is no more, is hard to imagine. He is a journalist standing tall among the community. Till his last breath he was contributing to the columns. There is no Telugu daily without his article. 45 years of my friendship vanished yesterday to my utter grief.

He introduced the feature articles in Telugu as part of the triumvirate - Potturi Venkateswara Rao and ABK Prasad being the other two when EENADU daily was launched. Till then only the English dailies used to carry the features on editorial page.

When I was Agent (now the Branch Manager) of Agricultural Development Branch, SBI, in 1972, he visited my branch as a UNI correspondent. He inquired of the activities of my branch because ADB was a structural innovation in branch banking of the SBI to serve the farm sector different from the other sectors it used to engage in. After seeing the farmer crowd, he asked me how will the 2000 SF/MF would be financed their crop loans in a week or ten days - as seasonal lending is of utmost importance. I told him that we would be completing the documentation and due diligence process in the villages adopted by the Bank and they were 31 in number. He asked me whether he could accompany me on such visits. I said: yes and next day we started for the villages at 7a.m from my residence.

He saw the bank field staff and me filling up the 9 page application, taking signatures on 9 page document of hypothecation deed, Demand Promissory Note and Take Delivery letter involving no less than 400-odd signatures and thumb impressions ( inn respect of illiterate farmers). We could complete on that day documentation and disbursement of farm loans to the extent of just 50 farmers!

At about 3p.m he left telling that he has to file a story from the office. Next day, June 20, 1972 if I recall right, all the news dailies and weekly tabloids and monthly journals later carried a box item:

'A Farmer has to affix 420 LTI/signatures even to get a Rs.100 loan. B. Yerram Raju, Agent, ADB, confirmed in a village adopted by the SBI ADB in Thagarapuvalasa Block of Bhimunipatnam Taluk.'

My residential phone on that  day started ringing from the day dawn - all calls from the Regional manager, Development Manager (Agriculture), Secretary & Treasurer and so on. The RM asked me to fly to Hyderabad as the Chairman R.K. Talwar wanted me to meet him. I took the Indian Airlines mid-noon flight.

The worry of the Bank top management was that using all the influence, they had published a photo of the inauguration of State Bank Staff College with Y>B. Chavan, the then FM and the Chairman of the Bank and the Principal in the front page of the then widely circulated Deccan Chronicle and right underneath the photo the above box item appeared almost annulling all their PR effort.

The most progressive Chairman that the SBI ever had in post-independence India, discussed with me over lunch the way forward to reduce the misery in such documentation. The solicitors were summoned to the Central Office and the Development Manager Agriculture facilitating documentation was simplified within a month.

VH proved what a journalist could do. He established DNF and published my first book under that banner: Commercial banks and rural development - Issues & Trends in 1981. He has a penchant for statistics and his analysis beats some of the best analysts on the financial dailies even at his 91. What a loss to the world of Telugu journalism? He has established the School of Journalism and produced a large number of responsive journalists.

He was responsible for my subscribing to the columns of Telugu dailies feature articles on subjects of public interest and they are as many as 250 out of my all the other feature articles numbering over 2000. Even 15 days ago he called me up and had a discussion on the fundamentals of GST and its impact on the economy. He wrote a piece on GST in Prajavani next day. A journalist of unparalleled stature exited this world!

Wednesday, December 7, 2016

Debates, Discussions, Demonetisation and Distress

Debates, Discussions, Demonetisation and Distress

Most discussions and debates on demonetisation have a few things in common: the move is right; it is the worst planned event in India’s economic history; calculations on black money went wrong; and rural masses are in distress unable to meet their daily needs. I am a strong votary of demonetisation. I am, however, not a supporter of complete digitisation or cashless economy. Less cash economy can be a target of gradualism and not maximalism.

Former Governors of RBI, C. Rangarajan, Y.V. Reddy, and Subbarao also lent support to the move in their articulations in the Press and media. Kenneth Rogoff, renowned economist also supported the move, but the mechanism suggested was gradualism and not a sudden action like the currently engineered measure. However, would all these articulations, mine not excluded, alleviate the distress of the vast rural masses?

Both houses of Parliament demanded a discussion, but were unwilling to discuss demonetisation for reasons that the common man was unable to understand. The distress of those who had to bury their dead or had imminent marriages in the family, not to mention the plight labour on daily wages has been immense.