Banking
Credit Cards, Credit Ratings & Phoney Customer Care of Banks
Many of us won’t forget a presentation by Ravi Subramaniam, ex-banker and author of several thrillers set in banking. His book, If God Was a Banker, opened our eyes to the millions that Citibank probably earned on ‘Citibank Suraksha’, an insurance that was quietly loaded on to consumers, without their consent, in the 1990s. (The book, of course, has a fictionalised account—so any similarities that I have found with Citibank are purely coincidental.) Although there was a media furore, the bank in the book only reversed charges if a customer called to complain. Apparently an overwhelming majority didn’t. The bad press didn't matter as long as the bottom-line was fattened and it was, in a big way. 
 
Two decades later, HDFC Bank faces a similar controversy over its Rs110 ‘account management’ fee charged to customers without their consent. A furore ensued and has led to some change. But not enough – it remains an ‘opt-out’ service. HDFC’s head honcho, Aditya Puri, who was coincidentally with Citibank during the 1990s, will be laughing in his Bank and probably snag another trophy or two as the ‘best banker’
 
In HDFC Bank’s case, at least the shareholders probably approve of what the bank is doing. But what about State Bank of India (SBI), owned by the government of India? Its chairperson is busy recovering both the cost of Jan Dhan accounts (as she has admitted) and the Bank’s bad loans from its hapless depositors, by levying hefty charges on a range of poor services.
 
Earlier this month, SBI launched its ‘Unnati’ card, which will drag its customers into the heaven of “digital transformation through cashless transactions.” Meanwhile, chairperson Arundhati Bhattacharya has announced that the Unnati card will be issued to anyone who has a cash balance of Rs25,000 in his account (including Jan Dhan account-holders) without going into their credit history. Ms Bhattacharya portrays this as a selfless national service. It will cater to the credit card requirements of new users, especially those without any prior credit history, she said, adding, “we must credit empower our citizen and this is an initiative towards that.” We have a different interpretation. SBI is luring unsuspecting users. For this, it is offering ‘zero annual fees’ for four years. 
 
This brings us back to Ravi Subramanian’s talk. One big insight from him was how every action of card-issuing companies that appears to benefit a card-holder is actually geared to improve its own revenues. It is meant to encourage you to spend money that you don't have and cannot repay at the end of the month—so you roll it over at a usurious interest rate. When an issuer upgrades your card—silver to gold, or gold to platinum—it is rarely because you are a good borrower (who diligently clears all dues at the end of the credit period), but because the bank earns a higher commission. In fact, credit card issuers love customers who roll their credit and pay the minimum dues. Those who pay up on time are a cost and a burden. So let’s examine SBI’s generous Unnati offer more closely.
  • SBI’s ‘zero’ annual fee is an eyewash. What the card-holder needs to know is what interest SBI will charge and whether there are other hidden charges and costs. At the moment, SBI has among the highest charges for a slew of banking services, including minimum balance, cheque leaves, drafts, etc. In fact, its charges are often higher than those of private banks, without even the excuse of offering better service and ambience. 
  • Secondly, SBI is already hiking costs, even before the Unnati card hits the market. On 4th April, political analyst and doctor, Dr Sumanth Raman, tweeted, “SBI Cardholder, w.e.f. 1st April 17, Rs100 will be charged for payments made thru cheque of up to Rs2,000.” This is a charge waiting to hit the Unnati card-holder whose minimum payments may be below Rs2,000. Of course, SBI’s excuse is that it wants them to be part of national digital transformation, or be punished. 
  • Thirdly, SBI’s big push to increase the issue of cards and collections will raise funds to buy out General Electric, its long-time partner in the credit card business. By giving credit cards to every depositor who has 25,000 in her bank account, SBI expects a 300% growth in the card business in one year. If plenty of these customers, with no previous knowledge of the high interest credit card business, fall for the high-decibel, heart-tugging marketing (remember MasterCard’s ‘Priceless’ campaign?), it will mean big bucks for SBI. 
  • Fourthly, SBI simply cannot offer credit cards to all those who have Rs25,000 in their account. The Reserve Bank of India (RBI) rules clearly require it to “ensure prudence while issuing credit cards and independently assess the credit risk while issuing cards to persons, especially to students and others with no independent financial means.” So, hopefully, its claims are more gimmicky than real. 
 
Credit History for Whose Benefit?
The SBI chairperson told a newspaper, “Presently, lack of credit history has been a challenge in increasing the card penetration in the country. In such a scenario, this card is likely to facilitate in generation of credit history for new users, which will help bringing them into organised financial stream.” This is an extraordinary assertion. India is not Europe or the USA, where it is hard for people without a credit history to get a credit card. Nowhere does the RBI’s master circular mandate a credit history requirement for issuing new credit cards. On the contrary, the entire Jan Dhan drive was triggered by the fact that India has a huge unbanked population with no access to formal funding, and hence no credit history.
 
Indeed, our credit bureaus are only helping lenders. It is almost impossible for a credit defaulter in India to get a loan, barring rare exceptions by finance companies. Many defaults date back to 2005 or earlier when people were clueless about the consequences of being listed as a defaulter. Even today, most people become aware about credit scores only when they are refused a loan. No lender offers better terms, or lower interest, to good borrowers with a high credit score as a matter of right. Even when it comes to resetting interest downwards on their home loans, lenders will do their best to extort a charge unless the borrower is savvy enough to haggle and threatens to switch to another lender. Here, too, most borrowers are unaware that the bank knows that a high credit score will get them a good deal with a new lender. 
 
RBI, and the cartel of banks, are completely uninterested in educating consumers about these rights or the importance of credit scores. I wrote to three of the four credit bureaus this week to check if they are aware of lenders who offer a better deal to borrowers. Two replied. They were unaware of any such benefits off-hand and offered to get back. Several months ago, I wrote about how Bank of Baroda was the only bank to frame an official policy wanting to introduce lending rates based on credit scores. We have not heard of any customer getting such an advantage. 
 
All this only goes to show that SBI chairman’s benevolence has everything to do with the Bank’s bottom-line rather than any concern about its new card customers who may end up getting unnecessarily indebted. A consumer website puts it beautifully when it says, “Once you enter the world of credit cards, it becomes tantalisingly easy to buy today what you can’t afford tomorrow.” But lenders and governments have a nice way of blaming individual greed for running up debt. That is why many borrowers in developed countries end up seeking psychiatric help to deal with addiction to credit-card spending. 
 
With RBI shutting its doors to any feedback and communication and the bank cartel being given full liberty to impose charges at will, we are fast headed to the bad old days of 2004-06 when bank excesses and shady marketing pushed millions into needless debt.

User

COMMENTS

Rajendra Ganatra

5 days ago

I have been a preferred customer of HDFC Bank for years. Recently I received this mail from HDFC Bank saying:

"..........we charge a nominal fee of Rs.100 + taxes per quarter per Customer ID for Savings and Current Account holders. The fee is charged only after you have enjoyed a free trial period of One Year"

There was no justification for this new charge which did not exist earlier. So I have opted out of the preferred customer status with HDFC Bank.

Thank Sucheta Dalal for this article, that I took note of the "routine" mail which took for granted, my consent for the charge, unless I would opt out of the service! It's time RBI advised the banks to seek express confirmation for any charge.

B. Yerram Raju

2 weeks ago

The article is very timely and most needed. On the 9th instant I presented four cheques issues by a firm. Of them only one got credited in the clearing. The other three were returned. Reasons are not informed to me although my account is linked to my mobile.I asked my issuer of the cheques, the reason: he ascertained from the HDFC Bank that he image of the cheque is not clear and hence rejected. But my bank, SBI without representing and without informing held the cheques with it and charged quietly Rs. 496 for the cheques as fees for the cheques returned in clearing!! I lodged my protest and the bank agreed to represent and it took eight days to get the credit. Who will pay interest for the delayed credit of Rs.82000/- and reverse the usurious charges for the return of cheques caused by bank lapse?

Sucheta Dalal

2 weeks ago

If usurious bank charges worry you, please join my fight against it. Sign and share this petition with your friends. It is easy to whatsapp or put on facebook : https://www.change.org/p/governor-rbi-finance-ministry-stop-banks-fleecing-depositors/w?source_location=petition_nav

REPLY

Sucheta Dalal

In Reply to Sucheta Dalal 2 weeks ago

You can also copy this smaller URL : https://tinyurl.com/k45z4n5

Sunil Prakash

2 weeks ago

Banks services are deteriorating. Some nationalised banks have showns customer icare improvements, but then since online banking has come, most of them have stopped personal responses. The people responding from online are just nuts and do not wish to respond, they have set replys to what ever queries you raise. Pitiable condition.

Jagdish Chavan

2 weeks ago

Thanks for writing and following up bank's openly exploiting common man. I had ISA account with HDFC for few years. Took me time to realize I get zero value having this type of account [rather it was pain to sort out issues even between HDFC MF and HDFC Bank] and only excess charges debited from account. Closing the account was double pain, at point HDFC representative was asking me to redeem all MF units to close ISA account. Thank god, I was aware that time and didn’t follow their advice. Its 5-6 years old story. Re: CITI, I heard many stories but yet to experience serious issues.

ksrao

2 weeks ago

The combined motto of banks and credit card companies is really, "Use now and regret later". Bernard Shaw said, "Income one pound, expenditure nineteen shillings, result happiness. Income one pound, expenditure twentyone shillings, result misery."

Yazdi Tantra

2 weeks ago

Forget Farmers' suicides - Credit Card Debt induces suicides in several countries -
http://www.thenational.ae/world/south-asia/spiralling-debts-and-shame-drive-dozens-of-indians-to-suicide-in-uae
http://www.creditcards.com/credit-card-news/debt-depression-and-suicide-1264.php
https://www.sott.net/article/314184-Financial-suicide-Credit-card-debt-in-the-United-States-is-approaching-a-trillion-dollars

sundararaman gopalakrishnan

2 weeks ago

I fully agree with whatever is said in the article..I have an HDFC Bank Visa card since last 9 years and rarely use it.Have kept the same since i travel abroad frequently and in case i need to use it overseas in extreme emergency..Debit card is any day better..

Vivek Silla

3 weeks ago

Increased issuance of credit cards might be a good push on the digital economy, but comes with its own set of risks.
Credit Card is a lovely financial instrument for the customers as long as they are used judiciously and the payments are made on time. In addition to the up to 50 days interest free period, it also gives host of other benefits like rewards points, lounge access, cash back, attractive deals and discounts, travel insurance etc. based on the type of the card. Further, it can always be of assistance in case of emergency.
So like every other financial instrument, the onus is on the customers to use the credit cards judiciously to avail maximum benefits from the credit cards. As the old saying goes, cut your coat according to the cloth. The rule of thumb should be that one spends from credit card only as much as he or she can repay within the due date. One should not indulge in spending on unnecessary things using credit card, just because he or she has a good credit limit as eventually he or she has to pay it up, if not within the due date, then with fees and crazy interest rates.
I would expect the media and financial press to create awareness about responsible usage of credit cards so that customers may benefit the most out of the credit cards.
Regarding your point that SBI simply cannot offer credit cards to all those who have Rs25,000 in their account and hopefully, its claims are more gimmicky than real. As rightly stated by you, The Reserve Bank of India (RBI) rules clearly require it to “ensure prudence while issuing credit cards and independently assess the credit risk while issuing cards to persons, especially to students and others with no independent financial means.”
So it is up to SBI discretion to issue or deny credit cards to any individual based on its own credit risk assessment. So if SBI is ready to issue cards, so be it. SBI is a bank and would definitely care for its own business and might have done a risk benefit analysis prior to taking this decision. They definitely might be looking at their own benefits, whether it is to buy out GE or whatever be it.

Mandar Kulkarni

3 weeks ago

I've held a Citibank credit card for 5 years, have paid back every bill on time fully. Never got a call to enhance my credit limit or upgrade my card. Someone known to me fell back on payments and opted to convert his spends to EMIs, got his credit limit doubled in 6 months!!! It was only after I sat down with a pen and a paper, this person woke up and paid back full outstanding by liquidating some of his savings. Lot of us don't read the fine print and most of us aren't capable of deciphering the fine print.

Mandar Kulkarni

3 weeks ago

I've held a Citibank credit card for 5 years, have paid back every bill on time fully. Never got a call to enhance my credit limit or upgrade my card. Someone known to me fell back on payments and opted to convert his spends to EMIs, got his credit limit doubled in 6 months!!! It was only after I sat down with a pen and a paper, this person woke up and paid back full outstanding by liquidating some of his savings. Lot of us don't read the fine print and most of us aren't capable of deciphering the fine print.

Ramesh Poapt

3 weeks ago

this' addiction' is worse than alcohol,drugs...

p venkateswara

3 weeks ago

They say 45 days credit you will get & they say you neednot to pay full amount of monthly bill, you can pay 5% of the bill or you can opt for EMI. they creat a confusion, finally the customer will go to their hands.

Gurudutt Mundkur

3 weeks ago

I would tend to believe that you are a bit to harsh on the Banks. I have had a citibank creidt card for over 18 years, and have not paid a single paisa as penalty. I know what my limits are... they are not the limits set by Citi Bank, but are the limits to which i can repay when the payment becomes due. So I have know problem.... IDO NOT FALL FOR THE BEAUTY OF A LADY IF I CANNOT FINANCE HER DESIRE FOR LUXURIES. If I did not, i would have suffered and become a pauper. I know when my payment is due and also time my purchase at the beginning of the billing period, to extract the maximum of credit time. I am one of the poorest customer of the Bank. I also extract he maximum reward points to the extent that during these eighteen years, I have been to the U.S.A using the reward points and continue to stay in Hotels at almost 10% of the regular rates. Sorry, as it is sadi --- nobody can fool you if you do not want to be fooled.

REPLY

Sucheta Dalal

In Reply to Gurudutt Mundkur 3 weeks ago

With all due respect sir, you should not judge the financial literacy of others, who may not have your background or savvy. It is harsh and callous. For the past 7 years, we have run Moneylife Foundation and come across stupefying cases of wealth destruction, even by those who have businesses with a turnover of Rs 40 crore and above. Their trust is betrayed and finances destroyed. It is always easy to blame all those who get cheated or tempted as weak and foolish. But most of us are foolish about something or the other in life -- sometimes about our health, or physical security. It is best not to judge. We go by hard facts and numbers. Moneylife Foundation runs several helplines and free daily clinics, so allow us to say we know what we are talking about and how this will get misused.
I must also mention that taking up these issues is a thankless job, but someone needs to do it. We lose advertising and sponsorship support when we write against banks -- believe me, there is no INCENTIVE to write this. It is only the truth!

Vidya

In Reply to Sucheta Dalal 2 weeks ago

Hi Sucheta,

Many people appreciate the good work done by you, I am one of them. Please continue to educate customers and challenge what is not ethical and not correct.

Anand Vaidya

In Reply to Gurudutt Mundkur 3 weeks ago

The bank will classify you as a "bad customer" atleast as far as credit card goes. You're not the type of customer they are looking for :-(

Radhakrishnan Machat

3 weeks ago

Customers are no more kings. They are pawns in the hands of banks. If an account holder is levied service charge after a certain number of operations, shouldn't the customer be given an annual dividend as banks make money through their deposits? The Reserve Bank of India, which is supposed to advice banks against fleecing customers, seized to be an institution which earned people's respect.

Nifty, Sensex May Remain Under Pressure - Weekly closing report
We had mentioned in last week’s closing report that Nifty, Sensex may go sideways. The market opened on a positive note on Monday, with the rally continuing on Wednesday after the off on Tuesday; the rally however didn’t continue on Thursday. Overall, for the whole week, the major indices closed with marginal gains. The trends of the major indices in the course of the week’s trading are given in the table below:
 
 
Positive domestic cues, coupled with a strong rupee and healthy buying in capital goods and consumer durables sectors, gave a fillip to the Indian equity markets during the mid-afternoon trade session on Monday. Both the key Indian indices touched new 52-week high levels during the intra-day trade. 
 
Healthy macro-economic data -- the Nikkei India Manufacturing Purchasing Managers' Index (PMI), which showed that India's manufacturing activity rose to 52.5 in March from 50.7 in February -- aided the upward trajectory of the key Indian indices. Besides, investors' sentiments were buoyed by the passage of the Goods and Services Tax Bill 2017 -- a major tax reform -- and Finance Minister Arun Jaitley's pegging India's GDP growth at 7.7% in 2018.
 
The Indian markets were closed on Tuesday on the occasion of Ram Navami.
 
On Wednesday, the Nifty ended 0.30% higher at 9,265.15. Earlier in the day the index hit 9273.9, its highest ever. Indian shares climbed with key benchmarks registering new record high as foreign funds continue to ramp up their investments in local equities. The S&P BSE Sensex gained 0.2% to 29,974.24 – a record closing for the 30-share index. Intraday, the benchmark crossed the 30,000 mark for the first time since March 2015. Meanwhile, the NSE’s Nifty 50 index rose 0.3% to 9,265, also a record close for the index. The 50-share index made an intraday high of 9,273. All the sectoral indices, barring the technology index, advanced on the BSE.  The market breadth was dominated by the bulls, with three stocks advancing to every one stock that declined on the NSE. In the sectoral landscape, realty stocks surged the most, sending the S&P BSE Realty index 4% higher, at 1671.21. The rally was fuelled by rise in shares of Sobha, Godrej Properties and Unitech. The domestic equity market continued its winning momentum for a second straight trading session of FY18 as benchmark indices hit fresh highs, fuelled by heavy buying in blue chips such as Reliance Industries, Maruti Suzuki and L&T.
 
The S&P BSE Sensex closed the session 47 points lower, at 29,927, with ITC, ICICI Bank and SBI contributing most to the fall. The headline index, which opened at 29,946 against the previous day’s close of 29,974, hit an intraday high and low of 29,954 and 29,817, respectively. 
 
In the midcap space, the S&P BSE Midcap index closed 0.15% higher, at 14,276, with Jindal Steel, Concor and M&M Finance being the major contributors in the surge in the index. The broader Nifty50 of the National Stock Exchange (NSE) ended at 9,261, down 3.20 points.
 
Benchmark indices ended the day on a lower note, but not before staging a recovery from the day’s low after the RBI’s policy announcement. The Street had factored in the central bank’s decision. A rally in real estate stocks could have helped in the recovery.
 
The Reserve Bank of India (RBI) kept the repo rate unchanged at 6.25% on Thursday, forecast robust 7.4% growth in 2017-18 aided by waning effects of demonetisation, although inflation risks remain in the medium term. The RBI hinted at a looming inflation threat over the next 6-12 months, obliquely leaving the door ajar for an interest rate hike in 2017-18. For 2017-18, inflation is projected to an average 4.5% in the first half and 5% in the second half. “Underlying inflation pressures persist, especially in the prices of services. Input cost pressures are gradually bringing back pricing power to enterprises as demand conditions improve,” the central bank said flagging weak monsoon, expected rise in government employees’ allowances and goods and services tax (GST) as the primary factors that could knock up prices in the short-term.
 
On Friday, the Indian Equity Benchmarks fell sharply, with the Sensex falling 220.73 points, closing at 29,706.61, and Nifty closing slightly below the 9,200 mark, at 9,198.30, after the US military launched cruise missiles against a Syrian airfield. The market however recovered some losses during the noon trade on clearance to important GST bills in Rajya Sabha. 
 
Markets across the globe came under pressure after the US military launched cruise missile strikes against a Syrian airbase controlled by President Bashar al-Assad's forces in response to a chemical attack in a rebel-held area.
 
Asian equities ended mixed but European markets like France's CAC and Germany's DAX were trading lower by 0.1-0.5%. However, the rupee strengthened against the US dollar, 28 paise from previous close, ending at 64.23. 
 
Reliance Industries, ending 2.31% lower because of profit booking following the TRAI order to Jio to withdraw its Summer Surprise Offer, was the biggest contributor to the Sensex  fall. Shares of Idea and Bharti Airtel rose by 1.04% and 0.89% respectively after the announcement. Avenue Supermarts gained 14.22% on NSE, closing at Rs758.90 after the credit rating agency CRISIL upgraded its rating on the long-term bank facilities and non-convertible debentures of the company to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Positive’.
 
In the Sector space, Pharma sector fell the most, by 1.35%, with Sun Pharma, Lupin and Dr Reddy’s contributing most to the fall, falling by 3.04%, 2.61% and 2.32% respectively. Auto- 2 & 3 wheelers sector rose the most, by 0.82%, the major contributors being TVS Motor (4.18%) and Scooters India (3.83%).
 
The BSE market breadth was bearish -- with 1,660 declines and 1,250 advances. On NSE, there were 1,042 declines, 648 advances and 72 unchanged.  

User

Should Loan Waivers to Farmers be Banned?
Most financial dailies and newspapers carried editorials or opinions on farmers’ loan waivers, following the anguish expressed by the Chairman of State Bank of India (SBI) on the scheme announced by the Uttar Pradesh (UP) government. The Reserve Bank of India (RBI) Governor, releasing the Monetary Policy for the second quarter of 2017, called the farmer loan waiver scheme “a farsighted policy of the politicians that would do harm to the borrowing discipline.” Even viewed in the backdrop of experiences of 1990, 2008 and 2014, the reports from the Comptroller and auditor general (CAG) tabled in Parliament and the legislatures exposed the weaknesses of the State adventures.
 
Farmer loan accounts of the banks are as perfect or as imperfect as the land records of the farmers, as has been noted in an evaluation study of the Telangana crop loan waiver programme conducted by Development and Research Services Pvt Ltd (DRS), at the behest of the Government of Telangana.
 
The questions requiring answers are: 
Is lending to peasants a sovereign risk or credit risk? 
Is the peasant by habit as much a defaulter as borrower? 
Is the lender following discipline in extending credit to the farmer? And 
Will the lender’s discipline precede or succeed borrower’s discipline? 
 
The Ten Myths in farm lending:
1. All farmers require loan waivers.
The fact is that they require loans equal to the flow of a live river. The reason is that their liquidity is always locked up in soil or silo.
 
2. All banks lend for farming, knowing the nuances of the activity, and lend in time and to the extent required.
 
Most of the banks lend to crops and activities mechanically as per norms of National Bank for Agriculture and Rural Development (NABARD). Lending to farming is just arithmetic and neither related to the exact needs of farmers nor in time.
 
3. Farm Credit is supervised credit.
Several field officers/ rural development officers cannot identify the farmer with the farm cultivated – owned vs leased, extent, save exceptions and they rarely have time to step out to the farms and villages. 
 
4. Banks invariably meet all the credit requirements of farmers.
Rarely. Banks distinguish production credit and consumption credit, but the latter is left for the moneylender to take care of.
 
5. Banks are meeting the targets under crop loans assigned to them and even exceeding them. 
Banks make book adjustments, barring exceptions.
 
6. Banks issue Kisan Credit Cards (KCC), which are like credit cards for the farmers.
KCC is not like the normal credit card that can be swiped by the farmer to the extent of the assigned limit at will and repay as and when crop harvest is sold. 
 
7. Group Loans (Joint Liability Groups-JLGs), Rythu Mithra Groups, Self Help Groups (SHGs) are effective means to deliver credit to lease-hold farmers.
Though SBI did it in the initial years of lending for agriculture, it abandoned group loaning. NABARD tried to push JLGs but did not find favour with banks.
 
8. All farmers are willing to pay for insurance.
Farmers are apprehensive of all insurance schemes as, at no point of time, farmers get all their claims responded to with a sense of urgency. 
 
9. Farm credit is insured. 
The obverse is true. Even the worst disasters never got the claims of farmers settled to the extent claimed, on one score or other.
 
10. All big farmers are honest.
They have other businesses and they invariably have surplus, as agricultural income is not taxed. 
 
The above myths should be adequate to say that the borrower discipline is as strong or weak as the lenders’ discipline.
 
The decision to write-off should vest with Parliament only in cases of acute natural calamities. This is in conformity with Chanakya’ Arthashastra principle that advocated loan write-off of farmers in such events. 
 
Political parties should be barred from making farm loan waiver as electoral promise. Though loan waiver per se is not an undue favour to the distressed farmers deprived of his source of income, the Election Commission should treat it as largesse on par with corrupting the voter. 
 
It is income and not credit that should be ensured for farmers. Whenever farmers do not get adequate price for their produce (minimum support price -MSP) or, in the event of loss of production, the State shall compensate the farmers the gap in income and the loss of income due to loss of production. Markets and credit institutions should work for better insurance mechanisms, when there will be no need for either the political parties to give bonanza or the banks to worry over the sovereign risk of write off that could decimate the credit discipline. 
 
(Dr B Yerram Raju  is an economist and risk management specialist.)
 

User

COMMENTS

Sanjeev B

3 weeks ago

1. What about the farmers who paid back their loans? Are they fools?
2. The amount needs to be made good by the government through their cheque book if they want to do this. Banks cannot fund this.
3. Why doesn't the government insure the loans? Will that not take care of this problem? Can state and private insurers come together to share the risk of default across the country? Can this risk premium be included in the interest charged for these loans?

Govinda Warrier

3 weeks ago

An excellent analysis. Without going seriatim, I copy below my response to Reserve Bank of India (RBI) Governor Urjit Patel’s expression of displeasure last week, over the current spate of farm loan waivers, who said that these (waivers) adversely affect the culture of repayments as well as put a severe burden on the exchequer.
“I think it undermines an honest credit culture. It impacts credit discipline. It impacts incentives for future borrowers to repay. In other words, waivers engender a moral hazard,” he said, after announcing the first bi-monthly monetary policy for 2017-18.

The RBI governor added, “We need to create a consensus that such loan waiver policies are eschewed. Otherwise, sub-sovereign fiscal challenges in this context could otherwise affect national balance sheets.”
My Response:
This refers to Abhijit Lele’s brief report “Urjit Patel slams loan waivers” (Business Standard, April 7). RBI Governor’s observation “I think it undermines an honest credit culture. It impacts incentives for future borrowers to repay. In other words, waivers engender a moral hazard…” echoes the gist of RBI’s consistent stand on loan waivers which was articulated on several occasions in the past including at the time of the introduction of Agricultural and Rural Debt relief Scheme (ARDRS), 1990. Centre and state governments, on most of the occasions, went ahead with their political agenda of such waivers which are partly responsible for spread of the malignancy of financial indiscipline to other sectors.
This time around, RBI has given the message loud and clear and the reference to ‘national balance-sheets’ should wake up the policy makers and opinion makers to the reality of the situation. When taxpayers money is diverted to purposes other than those for which taxes are collected and budgeted, governments will have to borrow to meet the extra burden which will create imbalances in fiscal management. Many popular schemes like ‘freebies’, tax concessions to corporates, and refusal to bring certain sectors like agriculture within tax net are already making the budget exercises at Centre and states level slip out of the accepted contours of financial discipline.
While RBI advice to move towards a consensus to eschew politically motivated agricultural loan waivers is timely and welcome and needs to be taken seriously, simultaneous efforts are necessary to provide relief to genuine borrowers. Such supports would include providing crop insurance, ensuring all linkages for getting timely inputs at reasonable costs, irrigation facilities, cost-related farm gate price, storage and transport facilities for perishable farm products and so on at reasonable costs.
M G Warrier, Mumbai

Chandragupta Acharya

3 weeks ago

If I am not wrong, there is already an Election Commission decision that freebies distort the free and fair conduct of the election. Not just loan waiver, an enabling framework to ban freebies, even as part of the election manifesto exists. But the EC has not acted on it. This issue is now ripe for a PIL.

darshan pandher

3 weeks ago

This ridiculous appeasement policy at the cost of Honest Taxpayers money to Govt for Votes ... MUST STOP!
At the same time,Govt is duty-bound to protect 'Cost of Production' to Farmers by -
1. Sharing Scientific Knowledge for Soil Testing,Fertilizers & Pesticides to optemise production.
2. Provide proper irrigation facilities & power to encourage farming.
3. Provide proper Storage and Transportation arrangements to avoid Crop Losses.
4. Ensure availability of Good Quality Seeds,Farm Equipment and Information to reduce dependency on 'Farm Loans'.
5. Promote modern techniques/methods of farming to make it profitable.

May be, then 'Farm Loans' will become a 'History"... Soon!

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