Recovery agents of private lenders who were, until recently, aggressively chasing retail loan defaulters in urban India have been tamed by the banking regulator. Now, public sector bank staff in rural India are facing the music.
The chairman of a large public sector bank told me last week that his employees would not dare to ask for money from loan defaulters in rural India any more. The 2008 Budget has announced a Rs50,000 crore loan write-off for small and marginal farmers and another Rs10,000 crore wavier for big farmers, who will be given a 25% discount when they come to settle their loans over the counter.
According to this CEO, who didn’t want to be identified, not just small and marginal farmers, but even artisans and small-time rural entrepreneurs will not pay back bank loans as they feel they are being “short-changed” by the government. So, the challenge before India’s state-run banking industry is how to protect the credit culture in rural India.
Farmers who have been regular in clearing their dues will start defaulting hoping that yet another loan waiver would come to their rescue in the future. Besides, the “complete waiver” also discriminates one farmer against another and that’s not good news for banks.
Unlike the Agriculture and Rural Debt Relief Scheme of 1990 that had a blanket waiver for any loan up to Rs10,000 for all borrowers, the new scheme does not have any cut-off point for a loan waiver. Instead, it promises to waive all loans that are not cleared until 29 February for marginal farmers with loan holdings of up to 1 hectare (ha), and small farmers, with land holdings between 1 ha and 2 ha. This means a marginal farmer at Nashik in Maharashtra, who is growing grapes, will get a waiver of around Rs1.5 lakh, while his counterpart in Uttar Pradesh, who grows maize, will not get more than Rs10,000.
This will encourage more and more grain growers in rainfed areas to shift to high-value cash crop.
The bigger challenge before 47,000-odd rural and semi-urban branches of the banks and some 100,000 primary agricultural cooperative societies is to complete the paper work within the next three months. The loan write-off scheme is to be implemented by June, also the beginning of the kharif (summer crop) season. But, the biggest challenge before the banks is in generating liquidity. A loan write-off per se does not make much sense for the farmers unless the banks start giving new loans. The Budget has not made any provision for the money and the finance minister has said the government would extend liquidity support to banks over the next three years. Commercial banks, indeed, have resources to offer fresh loans to farmers but, regional rural banks (RRBs) and cooperative societies do not have money to lend unless they get back their money from the borrowers or the government reimburses them of the loans waived immediately.
The target of agricultural loan disbursement by the banking system next fiscal is Rs2.8 trillion. Since crop loans account for about 70% of agriculture loans, banks will need to disburse Rs1.96 trillion soon. A back-of-the-envelope calculation shows cooperative societies normally account for about 30% of such loans and RRBs about 13%. This means, cooperative banks will need to disburse Rs58,800 crore and RRBs Rs25,500 crore. Unless the borrowers pay back and their deposit bases swell, where will this money come from?
The country’s apex agricultural bank, the National Bank for Agriculture and Rural Development (Nabard), offers 30% refinance to cooperative societies and 15% to RRBs at a concessional rate. This means Nabard will offer Rs18,500 crore to cooperative societies and Rs3,500 crore to RRBs in 2009. Still, cooperative societies will need Rs40,300 crore and RRBs Rs22,000 crore to meet their targets.
A recent Reserve Bank of India (RBI) report says, “A large number of primary agricultural credit societies…face severe financial problems primarily due to significant erosion of own funds, deposits and low recovery rates.”
These societies as a group had posted net losses of Rs857 crore in 2005-06. The recent restructuring of the loans of cooperative sugar mills in Maharashtra has further weakened the resource base of these societies as they have been denied repayment of over Rs2,000 crore worth of loans given to the sugar mills. These loans will be repaid over five years or so. RRBs are relatively better off.
Nabard offers its refinance at 3.5% to cooperative societies and 4.5% to RRBs. It borrows the money from market. Among the financial institutions, Nabard is one of the biggest bond issuers. The government bridges the gap between the cost of borrowing and the price of refinance, besides offering Nabard 20 basis points of the amount raised from the market to take care of its transaction cost.
Can Nabard raise more bonds to help RRBs and cooperative societies? Possibly not. Its ambitious plan to raise Rs5,000 crore in three years through “rural bonds” to retail investors, offering income tax benefit, has not really been a success story. Until end-January, it was able to raise only a few crores through this instrument, launched this year. Its zero-coupon, deep discount bond that promises a return of Rs20,000 on an investment of Rs8,500 in 10 years, also has not seen investors drooling. It has so far raised Rs1,500 crore against a target of Rs20,000 crore in three years. So, either the government or RBI will have to offer liquidity immediately. Otherwise, the biggest loan write-off programme in India will backfire. If fresh credit is not forthcoming, waiver of past loans is meaningless for farmers.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint. Your comments are welcome at email@example.com