Does loan waiver harm credit culture?

When Finance Minister P Chidambaran announced the farm loan waiver in the budget this year, critics perceived it as a populist move in an election year. At the Mint bankers’ conference in Bangalore on Friday, private banks were clear that the move has set a wrong precedent. Says P.T. Kuppuswamy, the chairman and CEO of Karur Vysya Bank, “Many of the rural branches were reporting to us one phenomenon — farmers were shifting accounts from our banks to nationalized banks. We were wondering why they are shifting the accounts and then farmers came and told it’s an election year. Definitely there will be a write off. If it’s a private sector bank then you might not get a waiver.”

6eb958d0-30c2-11dd-a95b-000b5dabf613.flvA NABARD study seems to corroborate that view. It says, repayments were falling for the last nine months. That is even before Chidambaram’s budget announcement. The waiver is expected to benefit about three crore small and marginal farmers and one crore other farmers. The government wants the banks to implement the debt waiver scheme by 30 June 2008 so that farmers can avail of fresh credit before the new cropping season.

Says S Balasubramanium, chairman and CEO of City Union Bank, “There are people who have obtained loan against jewels and even they are asking after closing the loans whether waiver is available. They are not remitting the amount.”

But as can be expected, nationalized banks are singing a different tune.

Says M.B.N. Rao, the chairman and managing director of Canara Bank, “I think this is much more strategic issue than just calculating rupee and paisa. Even when I compare it, it’s a very small amount. The western economy provides $300 billion subsidy to farmers.”

Public sector banks feel the waiver will help clean up the bank’s balance sheets as these loans would’ve anyway become NPAs. But many are not sure if farmers will benefit from this as the most needy in rural India borrow from moneylenders and not banks.