SBI chief Arundhati Bhattacharya says farm loan waivers upset credit discipline

Mumbai: Support to farmers is necessary but not at the cost of credit discipline as people who benefit from loan waivers often expect further waivers in future, which leads to many more loans remaining unpaid, State Bank of India (SBI) chairman Arundhati Bhattacharya said.

“Credit discipline breaks when you waive off farm loans. Money will come in today because government will pay but when we will give loan in future, farmers will wait for next elections. Support to the farmers is necessary but not at the cost of credit discipline,” Bhattacharya said on the sidelines of an event on Wednesday.

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Bhattacharya’s comments came a day after SBI announced a one-time settlement scheme on farm equipment and tractor loans, with the bank willing to take a 40% haircut. The scheme is applicable for loans up to Rs25 lakh. Such loans make up about Rs6,000 crore of doubtful and loss cases on the bank’s books, Mint reported on 14 March. The bank from time to time announces one-time settlements for certain customer segments to boost recovery rate.

The Bharatiya Janata Party (BJP) had promised to waive farmer loans during its campaign for the Uttar Pradesh elections. SBI, however, specifically said its current scheme had nothing to do with any government announcement. The previous United Progressive Alliance (UPA) government too had undertaken a major farmer loan waiver ahead of the 2009 Lok Sabha elections.

A report by the Comptroller and Auditor General (CAG) in 2013 found that of the 80,229 accounts that were granted debt waiver or relief, the beneficiaries in 8.5% of the cases were not eligible for either.

“Waiving off loan is an unhealthy activity…and every time a waiver is done, it diverts access to credit and shrinks credit availability,” former Reserve Bank of India governor Raghuram Rajan said in 2014 at a conference held in Mumbai.

At the event, Bhattacharya also said that public sector banks (PSBs) need to think beyond the government for capital gains, Bhattacharya said at the event. “I think we need to get out of that as it is not the case anymore. The government is very clear, they will give money only if you are actually efficient in all that you do,” she added.

Under the Indradhanush programme announced in 2015, the government had decided to infuse Rs70,000 crore in PSBs over four years wherein Rs25,000 crore each was to be infused in fiscal years 2015-16 and 2016-17 and the remaining Rs20,000 crore equally divided in two tranches in the next two years.

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In a note to clients on Tuesday, Kotak Institutional Equities said its study of previous loan waivers “does not conclusively give any evidence of deterioration in credit behaviour of borrowers and/or slowdown in growth in subsequent years”. However, the brokerage warned that the risk-reward framework had deteriorated in the priority sector lending portfolio as waiver was becoming a common phenomenon in elections.

“SBI is offering OTS (one-time settlement) for the past two months, which is quite regular. This is getting highlighted at this point of time because BJP had promised waiving farm loans by 2018. There is no connection between the two. With increasing competition, farmers will get loan at (the) right time and at (the) right price,” said Ashutosh Mishra, senior analyst, Reliance Securities.