Loan Waivers: A pill for an ill
On Tuesday, 4th of April,2017 the BJP led government of Uttar
Pradesh announced a loan waiver package of Rs. 36,000 crores. Of the 36,000
crores, 30,000 crores of farm loans up to Rs.1 lakh and 6000 crores worth of
defunct farm loan (Non-performing asset (NPA) in banking jargon) would be
waived off. This package is intended to benefit nearly 2 crore small and
marginal farmers in the state. Politically, it ticks all the right boxes but
the economic consequences are borne by the farmers and bankers.
The bankers are at the receiving end of this move, as there is a possibility of more loans turning into NPAs. The honest borrower (one who pays his/her installments on time) will have an incentive not to pay as the government takes care of the loans. The announcement in UP will have a domino effect on the farmers of neighboring states as they can stop repaying their loans and put political pressure on the respective governments to waive them off. Lending by banks is done on the basis of the borrower’s ability and intent to pay. It is a transaction based on trust and discipline. This action by the government erodes the credit discipline of the borrower and henceforth banks will be cautious in giving farm loans. The borrowing costs of farmers could go up as the banks feel it’s riskier to lend to small and marginal farmers. This seldom happens because the RBI has the policy of ‘Priority sector lending’ i.e. lending up to 40% of the bank’s Net Bank Credit (NBC) to specified sectors such as agriculture, micro and small enterprises, housing and educational loans. Of the 40% of the NBC, 18% needs to be lent to agriculture and allied activities, which means banks will inevitably have to lend to the farmers.
The government plans to mobilize resources for this package by issuing Kisan Rahat bonds. This will add to the fiscal deficit and crowd out the loans for private sector consumption. A common argument made for farm loan waivers is, 'look at the corporates who borrow large sums and don't repay'. The counter argument would be that two wrongs don't make a right. If corporates have evaded loan repayments the bankers are responsible for it. The solution lies in investigation, legal action and loan recovery. The farmer's inability to repay loans is a symptom of a deeper malaise in the agriculture sector. Declining farm incomes would require steps to boost productivity and farm yields. Crop failure due to failed monsoons or climate change can be dealt by using crop insurance as a tool to help farmers and not loan waivers. The government could help them further by reducing their input costs like seeds, fertilizers and diesel by giving them subsidies to their bank accounts. These measures take time, effort and political will to implement and the benefits last longer.
Loan waivers are used as a pill for an ill but people conveniently forget that there is an ill for every pill.
The bankers are at the receiving end of this move, as there is a possibility of more loans turning into NPAs. The honest borrower (one who pays his/her installments on time) will have an incentive not to pay as the government takes care of the loans. The announcement in UP will have a domino effect on the farmers of neighboring states as they can stop repaying their loans and put political pressure on the respective governments to waive them off. Lending by banks is done on the basis of the borrower’s ability and intent to pay. It is a transaction based on trust and discipline. This action by the government erodes the credit discipline of the borrower and henceforth banks will be cautious in giving farm loans. The borrowing costs of farmers could go up as the banks feel it’s riskier to lend to small and marginal farmers. This seldom happens because the RBI has the policy of ‘Priority sector lending’ i.e. lending up to 40% of the bank’s Net Bank Credit (NBC) to specified sectors such as agriculture, micro and small enterprises, housing and educational loans. Of the 40% of the NBC, 18% needs to be lent to agriculture and allied activities, which means banks will inevitably have to lend to the farmers.
The government plans to mobilize resources for this package by issuing Kisan Rahat bonds. This will add to the fiscal deficit and crowd out the loans for private sector consumption. A common argument made for farm loan waivers is, 'look at the corporates who borrow large sums and don't repay'. The counter argument would be that two wrongs don't make a right. If corporates have evaded loan repayments the bankers are responsible for it. The solution lies in investigation, legal action and loan recovery. The farmer's inability to repay loans is a symptom of a deeper malaise in the agriculture sector. Declining farm incomes would require steps to boost productivity and farm yields. Crop failure due to failed monsoons or climate change can be dealt by using crop insurance as a tool to help farmers and not loan waivers. The government could help them further by reducing their input costs like seeds, fertilizers and diesel by giving them subsidies to their bank accounts. These measures take time, effort and political will to implement and the benefits last longer.
Loan waivers are used as a pill for an ill but people conveniently forget that there is an ill for every pill.
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