The overall burden on the banking sector, of the loan write-offs of Rs 60,000 crore proposed in Budget 2008, is yet to be analysed fully, says Mr Robin Roy, Associate Director, Financial Services, PricewaterhouseCoopers (P) Ltd.
“This is almost 25 per cent of total rural credit disbursements of last year. On the other hand, SCBs (state cooperative banks) and RRBs (regional rural banks) have been asked to look at total credit needs of farmers, by using ex-bankers as business facilitators and counsellors,” he adds, in a recent e-mail interaction with Business Line.
Excerpts from the interview.
Any precedents that come to your mind, to provide a perspective for the banking sector in the light of Budget 2008 provisions?
The RBI’s annual report for 1991-92 had stated that the total amount of loan waivers claimed by banks, under the Agricultural and Rural Debt Relief Scheme, 1990, was to the tune of Rs 7,800 crore.
That scheme for borrowers of public sector banks covered those engaged in agriculture and other allied activities, and artisans engaged in any activity or rural development relating to cottage and village industry, handicraft, weaving, etc. The scheme had clear eligibility criteria as follows:
Loans taken between a defined period which were overdue to a bank on October 2, 1989, the relief would be available to a “non-wilful defaulter” who did not repay loan or loan instalments due, and experienced two or more years, whether consecutive or not, which were bad crop years resulting in crop yield being less than 50 per cent.
“Chronic over-dues”, that is, over-dues including overdue interest of an individual farmer, weaver or artisan or landless cultivator who had over-dues with such bank(s), aged more than three years.
Loans taken by a borrower who had died on or before October 2, 1989.
The overdue loan of a borrower who had been declared insolvent or whose petition was pending in the court.
What are the lessons from the past?
A conclusion that can be derived from the norms of 1990 is that the scheme was not a carte blanche for all loans. Studies have shown that, for loans serviced on time, the loanees usually had other sources of cash flow too, such as salary income.
The Task Force on Agriculture (2000-2001) estimated the loss caused to the farmers due to negative subsidy (difference between Government procurement price and market price), between 1980 and 2000, at Rs 3,00,000 crore.
Compared to this, the total loans extended to the farmers, by any estimate, did not exceed even a third, at that point of time.
What are the implications of the current proposal to waive farm loans?
This time, as announced in the Budget, all loans to rural farmers disbursed till March 31, 2007, and outstanding as on December 31, 2007, would be eligible for waiver. Technically, this means that even loans that are six months old are covered.
Typically, crop cycles are longer and thus there doesn’t seem to be a distinction among wilful defaulters, farmers affected by vagaries of nature, and farmers having insufficient cash flows. Banks may not be happy with such a situation.
Wonder, therefore, if the equation in Budget 2008 translates to: ‘Financial infrastructure’ plus ‘debt waiver’ equals ‘financial inclusion’!
Other points of interest…
Let me mention two things. One, the demographic dividend (that is, the increasing numbers in the age group 15-65) is a strong trigger for saving and consumption. This offers an enhanced opportunity for banks to penetrate the rural areas with a range of consumer loans. Reduction in excise duty on small and “hybrid” cars will provide opportunities to banks to finance more of automotive purchases in rural India.
And, two, the proposed Commodities Transaction Tax could act as a deterrent for the rather nascent market for commodities futures, which could go on to help farmers manage the risks involved in the entire value chain: production to buyer of the commodities. Expectations of an objective price discovery mechanism could also be nipped in the bud.
