Recently a local newspaper in Nagpur, Maharashtra, carried a report on groups of farmers taking oath not to repay the loans they have taken from banks. These small and marginal farmers, cultivating on agricultural land that is not more than 2ha, as owners or tenants or even sharecroppers, are cursing themselves for being good borrowers and religiously repaying bank loans while the government is waiving Rs71,700 crore loan given to 43 million farmers.
Small and marginal farmers who had taken loans in fiscal 2008, beginning April last year, are not paying their dues to banks even though the government’s loan waiver scheme covers loans disbursed up to only March 2007. In the Vidarbha region of the western state, famous for growing cotton and oranges, many farmers made money by shifting from cotton cultivation to soya bean last year. Even they are not clearing their bank loans. If every farmer decides not to clear bank dues, the entire rural credit culture will collapse. This is indeed a very serious situation. But at stake is more than the rural credit culture and the health of banks.
Commercial banks will not be hugely affected by this as they continue to get fresh deposits and use the money to disburse new loans. Under the banking law, they are required to extend 18% of their loans to agriculture. But the cooperative banks which use their entire deposit base to lend to agriculture and depend heavily on recovery of loans to give fresh loans, as their deposit base is very small, are finding it extremely difficult to remain in business.
The state cooperative banks, or SCBs, are at the top of the pyramid of the cooperative credit structure. Below them, there are some 363 district central cooperative banks or DCCBs. And, at the bottom, there are more than 100,000 primary agricultural credit societies, or PACs. These credit societies give short term crop loans to farmers. For long-term loans, used for buying tractors and other agricultural equipment, there are some 20 state cooperative agriculture and rural development banks (SCARDBs) or state land development banks (SLDBs).
A back-of-the-envelope calculation shows about Rs19,700 crore worth of loans, disbursed by SCBs and DCCBs, have been waived. Indeed, the government will reimburse these societies bulk of this money, some Rs19,300 crore, but no one knows how soon this money will reach these societies. Another Rs4,300 crore worth of long-term loans, disbursed by SCARDBs have been waived. If one includes the amount of debt waived by 92 regional rural banks, or RRBs, the total waiver by these financial intermediaries in rural India works out to Rs32,000 crore, involving more than 15 million farmers. In Maharashtra alone, more than Rs6,000 crore worth of loans given by cooperative societies and RRBs have been waived. For Andhra Pradesh, the amount is around Rs5,300 crore, and for Uttar Pradesh it is Rs4,100 crore.
The banking system’s target of agricultural loan disbursement this year is Rs2.8 trillion. As crop loans account for about 70% of agriculture loans, banks will need to disburse Rs1.96 trillion. And bulk of the disbursements should take place now in the kharif season that begins in July, during the south-west monsoon. cooperative societies account for about 30% of crop loans and RRBs about 13%. So, cooperative banks need to disburse Rs58,800 crore and RRBs Rs25,500 crore. With no sign of the government’s reimbursement yet and borrowers refusing to repay their loans, cooperative societies and RRBs cannot offer fresh loans.
India’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. It offers its refinance at 3.5% to cooperative societies and 4.5% to RRBs. The gap in the actual cost of funds and and price at which they are given is bridged by the government which also offers Nabard 20 basis points of the amount raised from the market to cover the transaction cost (one basis point is one hundredth of a percentage point). The cooperative societies and RRBs offers such loans to farmers at 7% and get a 2% subsidy from the government on such loans. However, they can can avail of the Nabard refinance only when they are able to finance the needs of farmers. If they do not have the money to extend loans in the first place, they cannot get the refinance.
The latest balance sheets of the primary agricultural credit societies are not available. In 2005-06, these societies had posted net losses of Rs857 crore. Around the same time, the accumulated losses of the state cooperative agriculture and rural development banks were Rs918 crore.
If the good borrowers stop repaying loans, the health of such bodies will further deteriorate. Nabard is planning to offer bridge financing to primary agricultural credit societies as well as state cooperative agriculture and rural development banks by borrowing from the market. But if the existing borrowers, who are not covered by the debt wavier scheme, stop repaying their loans, the intermediaries will not be able to repay Nabard’s money. That will create a bigger problem as the state governments, which own 25% of these banks, will then turn defaulter. And Nabard, which is also the nodal agency for disbursing the rural infrastructure development fund and monitoring its use, cannot sanction fresh money under that scheme to the defaulting states. The scheme, launched in 1996 with a Rs2000-crore corpus to build rural infrastructure, has a total kitty of Rs86,000 crore with contributions from public and private banks. So, it is not the banks alone. The entire rural economy will bear the brunt of the government’s biggest ever loan waiver scheme.
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