Mumbai/Hyderadabad/Bangalore: Kanuganti Laxma Reddy, a small farmer based out of Gaurayapalli village of Yadagiri Gutta mandal in Nalgonda district of Andhra Pradesh, is a happy man. He had taken a loan of Rs40,000 from a local bank two years ago but could not repay as he lost heavily because of a severe drought. His bank had already rescheduled the loan but now he will not have to pay at all as finance minister Palaniappan Chidambaram has announced waiver of such loans.
Reddy is one of the 30 million small and marginal farmers who will benefit from the biggest ever farm debt relief package—a whopping Rs60,000 crore— announced in Union Budget 2008. There are 10 million other farmers who will also get the benefit for the scheme which will be implemented by 30 June.
Burden lifted: Farmers smile at a gathering held after the announcement of the Budget. The farm relief package will benefit 40 million farmers.
Bankers, too, are happy as they feel the government’s package will help them clean up the balance sheets by removing the non-performing assets (NPAs) even as experts criticized it as a setback and a moral hazard.
Shares of most banks dipped as Chidambaram announced the relief package and didn’t initially mention whether banks have to pick up the bill. But, the stocks soon recovered when the government came with the clarification that the it will provide banks with “liquidity” over the next three years. No budgetory provision has been made for the “liquidity” support.
Bankex, the banking index of the Bombay Stock Exchange, gained 39.82 points or 0.40% to close at 10,113.73 following the clarification, after losing 380 points or 3.77%. Out of 18 bank stocks that constitute the banking index, 14 gained. Punjab National Bank gained 3.93% to close Rs610.25, Canara Bank rose 3.56% to Rs278.10 and State Bank of India gained 3.48% to close at Rs2,109.70.
The finance minister proposed a complete waiver of Rs50,000 crore loans for marginal and small farmers, and a one-time settlement scheme for all loans amounting Rs10,000 crore by other farmers, both overdue on 31 December and remaining unpaid until 29 February.
Under the settlement scheme, a rebate of 25% will be given against payment of the balance of 75%.
Overdue loans are those where payment is due but the borrower is not able to pay. After some time, an overdue loan becomes a non-performing asset.
As on 30 March, the exposure of commercial banks to the agriculture sector was Rs2.3 trillion. The total value of agricultural loans could be to the tune of Rs3.62 trillion, including loans of cooperative banks and regional rural banks (RRBs).
Commercial banks have non-performing agricultural loans of more than Rs7,500 crore. However, cooperative banks and RRBs, major dispensers of farm loans, have larger (NPAs) related to agriculture, and industry estimates put overall NPAs in the sector at around Rs31,000 crore.
At least another Rs30,000 crore worth of farm loans have been rescheduled thus far under various schemes. Loans that have not turned into NPAs but are “overdue” for repayment add up to another Rs40,000 crore.
The United Progressive Alliance government has rescheduled farm loans twice and waived interest in certain regions once.
Public sector bankers welcomed this move but critics argued that the waiver will dampen the credit culture. “When you do have an amnesty of this sort, you are creating a moral hazard with people in the future seeing this opportunity to postpone their own payment. The banks now have to go through a very very rigorous process of improving their risk management, monetary and provisioning system,” said Subir Gokarn, chief economist Asia Pacific for Standard and Poors.
However, Union Bank of India’s chairman M.V. Nair said that there was no risk involved here. “Banks have time-tested system of recovery. The farmers don’t want to default but they are compelled to do so when a crop failure happens. If we can have the one-time settlement system for urban areas and other industries, why not farmers?” Nair argued.
Bank of Maharashtra chairman M.D. Mallya also said that with other income generating schemes introduced by the government for rural areas, the chances of default are less.
Punjab National Bank chairman K.C. Chakraborty and Canara Bank chairman M.B.N. Rao too do not see any thing wrong in the government move. “We are not making any sacrifice,” said Chakraborty.
Banking analysts are apprehensive of such a large write off. “Though the fine print of the Budget is yet to be examined, it’s difficult to say whether the write-off of such a large amount of farm loans will not have any negative impact on banks’ balance sheets. The direct impact of this write-off may not be significant but the structuring of such loans will be an issue for banks in future and credit culture may suffer,” said Seshadri Sen, associated director, research financials and strategies, Macquarie Capital Securities India Pvt Ltd.
Hatim Broachwala, an analyst with Khandwala Securities Ltd, said the critical issue is how the banks are reimbursed. “If it’s by outright cash, it’s very positive for the bank, but if the government decides to give bonds it might turn out to be negative in the long run,” he said.
However, the present sop to the banks and farmer community won’t affect the public sector banks’ ratings as of now, said S. Venkataraman, director, ratings for Crisil Ltd.
P. Chengal Reddy, president of Federation of Farmers Association, said: “The agriculture sector is currently on a deathbed and if recovery measures are not taken now the country could reach a position where it could not meet its food requirements in the next two years.”
R.S. Deshpande, professor and head, Agricultural Development and Rural Transformation Centre, Institute for Social and Economic Change, Bangalore, said the loan waiver scheme was expected, but it could have been done in phases. He also said, “If the Budget does not distinguish between irrigated and non-irrigated areas, the benefit would be skewed in favour of farmers in assured rainfall areas.”
Chintala Venkat Reddy, a farmer based out of Alwal, near Hyderabad, added: “It is just a temporary relief... Unless the government takes long-term measures to ensure that the support price to the farm produce is raised in accordance with the increase in input costs, the country cannot attain the anticipated growth in its agricultural economy.”
Ashwin Ramarathinam contributed to this story.