Tuesday, August 19, 2014

Politician promises and Regulator disposes

Politician promises and Regulator disposes

There is an old adage that a farmer is born in debt, lives in debt and dies in debt. No farmer has liquidity when he wants cash in hand, for it lies either in land or stock. Farmer is today a part of the rule book, both with Governments and the financial institutions and the regulator.

AP and Telangana both the States, after formation, did not lose a minute in negotiating with the RBI the way forward to realising their hasty loan waiver promises. The States tried to bargain hard for restructuring the loans till they could find resources to fully credit the promised waiver amount into farmers’ loan accounts. The logic for waiver could be disputable but the request for restructuring on the sovereign guarantee has less reason to be faulted. This cannot be dubbed away as ’crony socialism’ – the meaning of which the creator of the phrase alone has much to explain.

The history of farm loan waivers – a sad one—politically motivated could have been resisted by the regulator even during the years 1990 and 2008. When the commercial banks were writing off loans of various other sectors but failed to respond to the farmers’ requests even amidst a do-or-die situation, the governments took law into their hands and claimed equity in debt treatment. In a political economy, howsoever puritan the economists are, the will of the politician prevails, particularly in democracy.

RBI after dilly-dallying for two months amidst hope and despair, decided to allow rescheduling of farm loans selectively in both the States.

Corporate Debt Restructuring for large corporate borrowers – the GMR, the GVK, LANCO, Deccan Chronicle, etc., earning profits and bidding for huge projects leaves one in doubt whether the greening banks’ books of accounts on a continuing basis unabashedly had tacit approval of the RBI. Why the farmers who face one calamity or the other year after year should be denied the loan restructuring facility even against the guarantee of State Governments on a different platter?

Existing guidelines on farm loan restructuring and rescheduling framed in the year 1974 (this author was a member of AFC-IBA Mission that framed these guidelines under the Chairmanship of P.F. Gutta) require fresh look by the regulator. The guidelines in those days did not distinguish one calamity from another. For example, cyclones would damage the soils with salinity while floods destroy the standing crops and even seed beds for that season. The effect of cyclone lasts for three to four years for normalcy to restore while in the year following floods due to silt accumulation, bumper crops would occur. Drought is a different ballgame altogether. Even the soil moisture would not be there for crops to be raised after continuous years of drought. Holocausts cause different types of losses to the crops. Further when those guidelines were framed there were no insurance mechanisms.

Crop insurance schemes even now are highly inadequate in content and delivery to take care of these varieties of losses, and require a comprehensive treatment. Post-harvest losses due to the natural calamities after their occurrence are more menacing than what the crop-cutting experiments indicate as crop prospects that determine what the district administration should declare under annewari.

The farmers also seek the whole marketing system to be revamped by modifying the provisions of the APMC Act 2005. Enabling the farmers to raise good crops in good season and creating capabilities to repay their obligations as respectable citizens is imperative. Financial inclusion for equity and financial discipline for stability are imperative for sustainable economic growth.

Due to the governments at the centre and states waiving partially the interest, in spite of budgetary announcements of crop loan targets, the crop loans of small and marginal farmers were mostly roll-overs while the incremental credit went in favour of large borrowers, contract farming, and urban farmers, if we were to go by the RBI published data. Therefore, in almost all the farmer-meets, there is a clamour from farmers that banks are weary of granting loans to them to the extent required for multiple activities and storage of crops and that the State Governments should enjoin upon the lending system to grant crop and other loans to them without delay and to the extent required at 4% interest rate suggested by Swaminathan Committee in 2007.

Even the most recent Round Table of farmers of both the States held under the joint auspices of FRSF and COKO (July 2014) favoured adequate and timely loans in preference to loan waivers. It is time to look at the RIDF that provided a window of opportunity to the commercial banks to make over their shortfall in priority sector – agriculture- lending targets and the Agricultural Debt Committee ( R. Radhakrishna: 2007)’s recommendation needs consideration.

Further, the senior citizens among small and marginal farmers and leaseholders having nothing to fall back upon in their old age, should be considered for old age pension of Rs.2000 per month.

May be it is time that the Parliament consider passing a law against any loan write-off announcement other than the loan provider with the sole exception of situations of natural calamities declared as such on the floor of the house. A special fund should take care of such write-off exercise with contribution from the State exchequer, Central Government, NABARD, and all the lending institutions in the proportion in which they lend to that particular sector.

In fine, I would suggest that the RBI would do well to examine the issues of farm lending portfolio more succinctly and create robust environment for safety, security and sustainability of farm credit. It is desirable to consider farm family as a unit for lending to enable cross-holding of risks from a variety of on-farm and off-farm activities that the farmers pursue so that in-built insurance mechanisms also come their way.