Sunday, June 1, 2014

The New Governments and the Loan Waiver

The New Governments and the Loan Waivers
B. Yerram Raju & M.L. Kanta Rao

Competitive populism compelled Rahul Gandhi while canvassing for the Congress party announced that he would write off up to Rs.2lakhs all individual farm loans. So did KCR, the CM-designate of the upcoming Telangana promised waiver of crop loans up to Rs.1lakh per farmer.

Seemandhra farmers are in a mood to rejoice: Voter bait won’t be voter wait – Chandrababu Naidu promises to sign the crop loan waiver for farmers as the first file as CM of Seemandhra (it would be however nice to christen the new State as Telugu Nadu). in Navyandhra and Nava Bharat where from now on people would be counting on the election promises of the winning parties, there will be no compromise on the promise. The NDA that met in Delhi on the eve of electing the leader of the BJP parliamentary party Viz., Narendra Modi, declared unequivocally that the poll promises would be realised and all the partners of NDA promised full support for the same.

Many sensible question both possibilities and extent of loan waiver for farmers. First, farmers’ loan waiver was introduced in 1990 with a waiver of Rs.10000cr for the small and marginal farmers. It was revealed that the beneficiaries were not the intended group but the large and medium farmers and also some non-farmers. The second time such waiver announcement came was in 2008 under the UPA regime, just before the 2009 General Elections – Rs.70000cr. Andhra Pradesh has its share of the “irregularities” committed in the implementation of the Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS), 2008. The Comptroller and Auditor General, in his report submitted to Parliament on Tuesday on ADWDRS, found that, among other things, one private Scheduled Commercial Bank (name not mentioned) received reimbursement for loans which were extended to Micro Finance Institutions (MFIs) in five states, including Andhra Pradesh. The amount reimbursed was Rs 164.6 crore (for all the five states). In AP, the total number of farmers who benefited from the scheme was 77, 55,227 and the total loan waiver and relief given to them was Rs 11,353.75 crore. All over India, the total amount waived was Rs 52,000 crore and the number of beneficiaries were 3.45 crore. As regards benefiting the MFIs, we should first know how much our share is in the Rs 164 crore that was paid to the bank towards loans advanced to the MFIs. We are yet going into details,” the then Union Finance Minister said. Doubts linger whether all the waivers would get into the right accounts. This requires integrity of data from the banks and promptness in disbursal of the waiver from the government, easily verifiable by the State Government authorities before actually releasing the waiver amount.

‘Reserve Bank of India has issued a circular in pursuance of the budget announcement made by the Finance Minister relating to the Interest subvention Scheme 2013-14, Interest subvention 2% p.a. will be made available to Public Sector Banks (PSBs) and Private Sector Scheduled Commercial Banks (in respect of loans given by their rural and semi-urban branches) on their own funds used for short-term crop loans up to Rs.3.00 lakhs per farmer provided the lending institutions make available short term credit at the ground level at 7% per annum to farmers.’

Interest subvention will not be available once the waiver is announced by the State Government and therefore, to that extent the State Government will have to bear this additional burden as well. It will be hazardous for the GoI to provide for loan waiver of AP as other States would not hesitate for raising similar demand. The existing fiscal position of the GOI can ill afford this luxury.
So far, loan write-offs or waivers occurred whenever there were natural calamities like floods, cyclones, severe drought or at the banks’ discretion in case of severe social calamities of some affected families of farmers either by reschedulement, one-time settlement or even full waiver. But the present situation is different. It is a promise made by a leader of stature and farmers believed and voted for him. The promise has to hold and ways have to be found to uphold the promise.

Farmers continue to be in distress not because of just burden of institutional loans against which the waiver is now promised but on account of huge private debt at usurious rates of interest with no credible documentation. What is now promised is waiver of crop loans by the upcoming Naidu government. First, the data: The outstanding crop loan amount in thirteen districts of seemandhra State covering around 23lakh accounts is to the tune of Rs.56838.23cr of which leaseholders numbering to 1.44lakhs had loan outstanding of Rs. 305.99cr. The actual amount overdue from the farmers in 22.56lakh accounts is Rs.20,288cr. It is most likely that the figures would have included gold loans given and classified as crop loans and these can be deleted from the claims for write-off.
Government of AP announced zero interest for kharif 2012 and the banks are not supposed to collect interest for Kharif 2012 for all crop loans up to Rs.1lakh per farmer. The interest subsidy will be calculated oon the crop loan from the date of disbursement to the date of actual repayment by the farmers up to the due date fixed by the banks whichever is earlier, up to a maximum period of one year. NPAs classified (that is loans overdue for payment beyond two crop seasons as per RBI instructions) in agricultural segment up to 30th September 2013 total to Rs.3329cr covering 5.16lakh farmers.

In so far as SHG groups are concerned, 14.70lakh members owe to the banks an amount of Rs.21245cr as on 30.09.2013,

If the CM would like to avail the interest subvention available for banks in case of promptly repaid loans with a cap of 7% then he has to seek approval for waiver of entire loan outstanding from Government of India bargaining for this subvention to be made available to the State Government as part of the write-off proposal. Second option is that he has to provide for entire outstanding crop loan amount of Rs.56838.23cr in the budget 2014-15. Appropriate revenue has to be raised from floating bonds to the tune of the entire waiver with a ten year tenor – whether they are zero coupon bonds or carry 8-9 percent interest per annum with a cap of 3years on redemption – is a matter for finalisation.
In any case, the FRBM norm has to be waived for at least two years to go to the market for raising these resources. Both waiver of crop loans of all banks and PACS/DCCBs and the SHG loans also require clearance from the RBI and Government of India. However, such waivers in good times perpetrate indiscipline among borrowers though in bad times like natural calamities prove the much needed relief.

Source for the data is from the 182nd SLBC meeting Review in January 2014.
Published in the New Indian Express, Hyderabad Telangana Edition dated 30th May 2014.