The latest enticement in the form of ‘loan waiver’ the Congress party is endowing on farmers to garner votes has been evaluated by many economists and bankers as a dangerous choice if implemented.
According to a report in the Economic Times, many economists fear that writing off loans in several states, including Madhya Pradesh, Rajasthan and Chhattisgarh, is likely to create a lending freeze for agriculture in the coming quarter as the public sector banks could anticipate a rise in non-performing assets (NPAs). Further, they feel that this may discourage banks from forwarding long-term loans to farmers.
The three states of Madhya Pradesh, Rajasthan and Chhattisgarh, where Congress has recently announced the ‘loan waiver’, has already an outstanding of almost Rs 1.47 lakh crore of agricultural loans. “If banks don’t get repayment of loans, where will fund to lend for the next cycle come from?” a banking executive, not wanting to be named, told the Economic Times. He reiterated that the states which go for loan write-offs not make an upfront payment of the total loans due to the banks.
With states like Uttar Pradesh, Maharashtra and Punjab announcing loan waiver in 2017 and the Congress-Janta Dal (Secular) coalition government in Karnataka following the same earlier this year, the total loan write off amount added up to Rs 80,000 crore so far. Now with these three states, joining the unprecedented move to underwrite a farm loan waiver, the write-off amount could rise to Rs 1.5 lakh crore, said the bank official.
Opinionating on this latest trend that is being popularized by the opposition, the United Bank of India’s managing director, Ashok Kumar Pradhan said “It is a deadly poison. It’s a wrong way of addressing the real issue.”
The possibility of many more state governments announcing such waivers is scaring bankers, who believe that even those who pay on time would be tempted to delay payments in the hope of such waivers.
“Undoubtedly, farmers’ expectations of loan waivers are going up,” said Mrutyunjay Mahapatra, managing director at Syndicate Bank. “It is not good for the country’s credit culture.”
With the suspected non-performing loans increasing sharply, soon after any debt waiver scheme for farmers is announced, as the farmers obviously, stop repayments and the delay from the state government to replenish the banks with the same, creates pressure on the lenders and tighten the flow of money.
The state government generally delays in paying the banks, as framing and processing the schemes take a lot of time and the banks generally receive fund from the government after a gap of more than four to five years. This creates pressure on the public sector banks which start feeling the cash crunch.
Further, bankers believe that if default becomes a norm, fresh lending to these farmers would be stalled because banking regulations do not allow disbursement of fresh loans to defaulters unless the loan is restructured.
The report also feared that there are threats of a rise in loan defaults spreading to other states as expectations increase for such debt waiver there, too. “This has a spiral impact on credit repayment culture. Repayments will halt these states with rising in defaults,” the official told the publication.
According to the report the ongoing farm loan waivers are likely to cost Rs 18,000 crore to the Rajasthan government and approximately Rs 35,000 crore to the Madhya Pradesh government. However, there is no unanimity in the banking industry on the amount.
HR Khan, former deputy governor of RBI and now the chairman at Bandhan Bank said, “There should be both political and technical solutions to this farm loan problem. “Farm loan waivers are only curing the symptoms. But there are structural issues. Production has increased but marketing has not. Moreover, Pradhan Mantri Fasal Bima Yojana (PMFBY) needs to be implemented in right earnest. Post-harvesting financing should be provided,” said Khan.
The NITI Aayog, too, has rejected farm loan waiver since it neither helps the state’s finances nor does it provide a long-term, sustainable solution to farmers’ distress. Such populist ‘solutions’ do not really address the fundamental issues and hurdles faced by the farmers.
The recent tactics being endorsed by the opposition, to captivate the poor farmers to garner their votes, is doing them more harm than good.