Mumbai: Several state-run banks and microfinance institutions (MFIs), which have lent to farmers and low-income segments in the erstwhile state of Andhra Pradesh, may face another round of losses as borrowers in the region have started to hold back on loan repayments in anticipation of a farm loan waiver, said bankers.

The chief ministers of Telangana and Seemandhra, the two states created after the bifurcation of Andhra Pradesh, have both promised a waiver of farm loans as part of their poll promises and are currently in the process of finalizing the plans.

On 24 June, an expert panel headed by former chairman of National Bank for Agriculture and Rural Development (Nabard), P. Kotaiah, appointed by the Andhra Pradesh state government to work out the debt waiver plan, met top officials at the Reserve Bank of India (RBI) to negotiate the possibility of a farm debt waiver.

In an emailed response, RBI confirmed a team from the Andhra Pradesh government met with RBI officials.

“The discussions were very preliminary. RBI can examine any scheme only after the details of the scheme are available. RBI has always maintained that waivers undermine credit culture and discipline and, hence, are harmful for the health of the banking system and stability," the RBI response said.

Even before the loan waiver programme has been finalized, several borrowers have already stopped repayments in anticipation of loans being waived, said senior bankers.

“Some of the borrowers have already stopped repayments on farm and gold loans. They say ‘why should we pay? Anyway it’s going to be waived’," said a senior official at a large bank, which has exposure to the southern states. The official declined to be named citing sensitivity of the matter.

The last time the country witnessed a farm debt waiver was in 2008-2009, when the then finance minister, P. Chidambaram, announced a 60,000 crore loan waiver package and one-time settlement facility to the small and marginal farmers. The size of the debt waiver rose further to over 70,000 crore loans as the scheme was extended to more farmers.

“That meant that many borrowers who had partly paid back their loans found themselves at the receiving end as they were treated on par with those who hadn’t paid back any. Hence, this time, ever since the news of the waiver came, customers are going slow on repayments," said the banker cited above.

Though the state government has promised to repay the waived amount to banks, bankers are worried.

“Prima facie, the state governments do not seem to have the wherewithal to go for a waiver," said the chairman of a state-run bank on condition of anonymity. Following the division of two states, the residual Andhra Pradesh government is running a fiscal deficit of about 15,000 crore.

Fearing a rise in defaults, banks have asked the state government to leave banks out of the loan waiver process and compensate farmers directly.

“We are not against any loan waiver to the farmers, who have suffered crop losses. But that should be transferred to the beneficiaries directly, without involving the banks," the bank chairman cited earlier said.

Vijay Mahajan, chairman of India’s oldest microlender Basix group and an expert on financial inclusion, said any loan waiver should be exercised with caution.

“Loan waivers help banks to clean up bad debts, including those caused by lending practices, at the expense of the tax-payer, whose money the government uses to compensate banks and, of course, loan waivers benefit politicians to win votes. It has nothing to do with the poor and, instead, encourages even the good borrowers not to pay back their loans," said Mahajan.

Adding to the deteriorating credit culture in the state is the fact that banks have been lending to borrowers who have defaulted on loans taken from MFIs.

Approximately 7,500 crore in loans given by MFIs are stuck in the region. Borrowers stopped repayments in the aftermath of a crisis in the industry following a controversial state law enacted in October 2010. That, coupled with a statewide campaign by political parties encouraging borrowers not to pay back, resulted in large non-performing assets (NPAs) for MFIs, a large chunk of which is yet-to-be recovered.

Even though the names of these individual borrowers are enrolled in credit bureaus, banks are going ahead and lending to these individuals under the self-help group (SHG) bank lending programme, said Padmaja Reddy, founder and managing director of Spandana Sphoorty Financial Ltd.

Citing this problem, Spandana has written to RBI and chiefs of several banks, Reddy said. Mint has a copy of the letter. “By doing this, banks are destroying the basic lending model of MFIs, which work on the basis of trust and dependency. On top of that, banks are risking their own money," Reddy said.

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