The questions that the government leaves unanswered have a nasty way of reappearing. At the time the farm loan waiver scheme was announced in February, several issues were raised by critics—that rural borrowers would realize it is okay to default, banks would have fewer incentives to be careful while lending and the cost of the waiver would blow a large hole in the government’s finances.
Finance minister P. Chidambaram had brushed off these issues by saying that he had done his homework.
Maybe he did not. State Bank of India (SBI) chairman O.P. Bhatt told analysts at a conference to announce the bank’s annual results that “people stopped repaying loans after the announcement of the farm waiver package.” This is not some impractical economist or carping journalist speaking. Bhatt heads the country’s largest bank.
The financial figures bear him out. The bank’s bad loans have galloped in the recent past. At the end of fiscal 2007, SBI had gross non-performing assets of Rs9,998.22 crore. These rose to Rs10,641 crore by the end of December 2007 and to Rs12,837 crore by 31 March this year.
There’s no point quibbling that there may be other types of borrowers responsible for rising bad loans. SBI, of course, is a strong bank. It has been able to raise Rs16,736 crore from a rights issue, money that will come in handy as bad loans rise.
The issue at hand is how the government refused to see the link between how individual farmers would behave in the face of such absurd schemes and its impact on the banking system at large. What will happen to weaker banks that don’t have recourse to equity dilution to raise cash? What will be the net result of government infusing cash to rescue such banks? Won’t it amount to passing the costs of such waivers to taxpayers? The government may deny it, but in the end the waiver amounts to that.
The government needs to learn that there is no way it can evade the macroeconomic consequences of profligacy. High-profile programmes such as the National Rural Employment Guarantee Scheme have been riddled by corruption. And the farm loan waiver will do long-term damage by harming credit discipline.
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