Why everybody loves a quick fix of loan waiver

Why everybody loves a quick fix of loan waiver
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First Published: Tue, Jul 29 2008. 10 31 PM IST

Himanshu
Himanshu
Updated: Tue, Jul 29 2008. 10 31 PM IST
The United Progressive Alliance, or UPA, government survived the trust vote in Parliament, a vote that came about after its former ally, the Left Front, withdrew support to it over the Indo-US civilian nuclear deal.
All political parties, including those that constitute the Left Front agree, however, that the nuclear deal, which the government wants and the Left Front doesn’t, will not be the main electoral issue in the general election, which will be held next year.
Himanshu
Outside Parliament, the key issues will remain the agrarian crisis, soaring inflation, and rising unemployment. Given this, one thing that the UPA could try to leverage to its advantage will be the loan waiver.
The Rs71,680 crore waiver of farmer loans, entirely or partly, is among the largest handouts to farmers in India’s modern history and the UPA is hoping that it will translate into votes. The key question related to the waiver, especially for the farming community is, “What next?”
This is because financial institutions and banks are beginning to fear that the waiver has spoilt credit culture in rural areas by providing farmers with an incentive to default on debt payments. Their natural reaction could be to tighten credit in rural areas to the extent they can without breaching government norms that set quotas on amounts banks need to lend to farmers.
This was already happening — despite credit from banks and financial institutions more than doubling since 2004-05, the rural populace finds itself in the grip of local moneylenders — and will increasingly happen.
Financial services in rural areas have been traditionally provided by commercial banks, cooperative credit institutions and the regional rural banks, or RRBs, (apart from informal sources such as moneylenders).
Commercial banks, however, have gradually withdrawn from rural areas since the introduction of international norms on income recognition, capital adequacy and asset classification that aim to make banks stronger.
The immediate outcome has been the decline in number of rural branches from 35,390 in 1993-94 to 30,750 in 2005-06. As a proportion of total bank branches, this fall has meant a decline from 55.9% in 1993-94 to 44.5% in 2005-06. The situation of RRBs is similar, with no increase in the number of branches.
The real victims of such financial sector reforms, however, have been the cooperative credit institutions. The previous National Democratic Alliance (NDA) government established the Capoor committee (report submitted in 2000) and later the Vikhe-Patil committee (report submitted in 2002) to suggest measures for revitaliztion of cooperative credit societies. Both reports, however, continue to gather dust. The UPA government is no better: it created the Vaidyanathan committee which submitted its report in 2005. The net result of this neglect has been the decline in the share of cooperatives in total credit from 49.1% in 1990-91 to 30.9% in 2004-05. With little financial support, most cooperative credit societies have either shut down or declared themselves bankrupt and the surviving are bleeding.
The problem is further compounded by the changes made in the functioning of National Bank for Agriculture and Rural Development (Nabard), the subsidiary of the Reserve Bank of India, or RBI, for refinancing of cooperatives. This refinancing is crucial for the functioning of cooperatives since they have limited access to retail deposits.
One such change was the withdrawal of RBI support to Nabard as part of National Rural Credit (long-term operation) fund. The last contribution of RBI of Rs400 crore was made in 1991-92. Since then, RBI’s contribution has been a token Rs1 crore to avoid violating the Nabard act of 1981 which makes it mandatory for the bank to contribute to this fund. Since 1992-93, the only contribution to this fund has been out of surpluses of Nabard itself. But even this has seen a sharp decline from a peak of Rs1,150 crore in 2000-01 to Rs30 crore in 2005-06.
The general line of credit for short-time finance reached a peak of Rs6,600 crore in 2000-01, remained around that level till the NDA government stayed in power and fell to Rs3,000 crore in 2005-06. Since 31 January 2007, even this facility has been withdrawn in the name of financial prudence.
The withdrawal of tax exemption given to Nabard in 2000-01 has put a further squeeze on the surplus available for putting back in agriculture. As a result of all this, market borrowings account for almost two-thirds of Nabard’s resources compared with only 11.7% in the beginning.
Despite numerous committees and task force reports, the last decade has seen a weakening of the rural credit institutions. The crisis in rural credit market was obvious given the policy structure and neglect of rural financial institutions which were already suffering from the introduction of Basel norms after liberalization.
But why does the finance minister prefer waiving loans to addressing some of these concerns? The answer is easy. Loan waivers fetch votes, while institutional reforms do not. It pays for the governments in electoral terms to create a crisis and then present itself as a saviour.
Himanshu is assistant professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi. Farm Truths looks at issues in agriculture and runs on alternate Wednesdays.
Respond to this column at farmtruths@livemint.com.
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First Published: Tue, Jul 29 2008. 10 31 PM IST