It’s going to be a different June for the chief executive officers, or CEOs, of government-owned banks in India.
They will leave their headquarters in Mumbai, New Delhi or other large cities that they work out of, to be with the managers of some 30,500 bank branches in the hinterland of the country—to ensure that every farmer walks away with a happy smile.
Three months after announcing the largest ever farm loan waiver programme in the Union Budget, the finance ministry has finalized the blueprint for the plan and the onus on making the scheme a success is now on the banks.
One look at the scheme and you will be convinced that India’s public sector banks, which account for about 70% of the industry in terms of assets, are not really commercial organizations.
They are a government department.
Theoretically, farm loans account for about 18% of their total loans, but in June, these CEOs will have no time to look at anything else as they need to complete the paperwork involving a massive Rs71,700 crore debt waiver programme that will help bail out 43 million small, marginal and other farmers.
Between now and end of June, every bank branch needs to prepare two lists—one for small and marginal farmers who are eligible for total debt waiver, and another for other farmers who will get 25% of their loans waived off under the plan. These lists will include “particulars of the land holding and…the amount of debt waiver and debt relief proposed to be granted in each case” and such lists must be “displayed on the notice board” of the branches “on or before 30 June”.
That’s not all. Banks need to ensure that a small farmer is indeed a small farmer—someone who has been cultivating agricultural land that is more than 1ha and up to 2ha. Similarly, the bank needs to make sure marginal farmers are just that. By definition, some cultivating up to 1ha, as owner or tenant or even a sharecropper.
Now comes the hard part.
A small farmer could have been reduced to a marginal farmer had he sold his land between the time he took the bank loan and the waiver plan kicked in.
Similarly, a marginal farmer could have upgraded himself by buying more land.
But the banks need to keep an eye on such things as they are “responsible for the correctness and integrity of the list of farmers” and “the particulars of the debt waiver or debt relief in respect of each farmer”.
Besides, each bank has to appoint at least one grievance redressal officer for each state to receive representations from aggrieved farmers.
Finally, “every document maintained, every list prepared and every certificate issued (to the effect that the loan has been waived and specifically mentioning the amount) by a lending institution” must bear the signature and designation of an authorized officer.
The 25% debt relief for other farmers is also no big deal as banks often go for deeper haircuts when corporate loans sour. And indeed, Rs71,700 crore, too, is not a big amount, considering the fact that 43 million farmers are involved. Each of them will benefit around Rs18,000, according to back-of-the-envelope calculations.
Apart from complaining, mostly in private really, about the logistical nightmare of implementing such a scheme, banks have nothing much to lose by implementing the scheme.
On the positive side, it will help them clean up their balance sheets because with the government reimbursing the money, they will not be required to provide for their non-performing assets in agriculture loans.
The scheme will not include loans that have already been written off by the banks, but the banks may not have complaints on this too, as they already enjoy certain tax benefits on those loans. They may, however, face certain accounting issues. For instance, they will complete the implementation of the debt waiver and relief scheme by the end of this month, but the government will release funds only over a period of time.
So, how will they classify these assets, which have technically turned performing assets but, for which, the actual repayment (from the government) has not come in? One can safely assume that the banking regulator will come out with some directives for the auditors on the treatment of such accounts.
The biggest drawback of the scheme is its impact on the credit culture in the banking system. It will serve as a great disincentive for those borrowers who repay bank loans on time.
The challenge before the finance ministry and the banking regulator now is to prevent these borrowers from turning into defaulters in future. One way of doing this could be to introduce a differential loan rate for farm loans.
Now, all farm loans up to Rs3 lakh are priced at 7% and the banks get a 2% subsidy from the government on such loans. Based on the credit history, the loan rate for the good borrowers can be brought down to, say, 6% or even 5%, with the government increasing the subsidy on such loans.
This will increase the subsidy burden on the government marginally, but isn’t it a small price to pay to protect the credit culture?
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint. Please email comments to firstname.lastname@example.org