Companies & Sectors
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.)
 

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COMMENTS

Sanjeev B

3 months 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 months 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 months 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 months 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!

An Innovative Approach to Resurrect BEST Part2
The suggested Innovative Fare Structure is basically to enable every commuter of a BEST bus to buy a daily travel pass for Rs25 or termed as 24HourPass. In return, the commuter will get the opportunity to on any BEST route, any distance, any number of times by Ordinary, Limited or Express or even air-conditioned bus for 24 hours from the first boarding. Buses will ply without bus conductors, thereby releasing about 5,000 bus conductors in each shift. These conductors will issue the 24HourPass at the bus stops, in addition to tickets for Rs8 and Rs10 for those not inclined to purchase the 24HourPass.
 
One of the advantages for the commuter is that he can board a bus travelling in the direction of his commute, without waiting for his destination bus, then change to a bus that takes him to his destination. He can take a detour to attend to some task on the way. If most people did this, then the waiting time decreases considerably for all. However, the travel time itself is currently also dependent on the traffic speed. Buses will still be crowded and that can be addressed by increasing the frequencies. This is achievable by increasing the fleet size or by speeding up  travel time or both. Speeding up is possible by introducing dedicated bus-only lanes, better still by introducing Bus Rapid Transit System (BRTS).
 
The shared taxi or auto services operate at attractive competitive rates to and from railway stations to specific locations. They seem to be cumulatively carrying a sizeable number of commuters, who would have otherwise taken the BEST bus. During an auto strike, little more than a year ago, the number of BEST commuters increased to 40 lakh straight away. Shared Auto schemes do not serve the needs of persons carrying luggage, as they have make their way from the auto drop point. Nor can they travel by bus. Carrying luggage with co-passengers also does not work out. These Share-Autos congest the roads to the station, whereby the buses serving rail commuters have poor turnaround time. During the auto strike, the bus turnaround time decreased considerably and the buses carried significantly larger number of commuters. 
 
Many commuters use aggregator taxi services. It is also a fact, especially on the Western Express Highway that many private taxi services or even private cars such as those used for airport drop, pickup passengers illegally from bus stops. The presence of conductors at these bus stops could stop the illegal pickups. 
 
At this suggested fare structure, the 28 lakh commuters will fetch an annual revenue of more than Rs2,250 crore to BEST, based on 300 working days and 65 Sundays and holidays per year, assuming that all sections will see the advantage of buying the 24HourPass. 
 
BEST’s annual expenditure on the transport wing is somewhere around Rs2,100 crore. This would mean the transport operations may not run in perpetual loss even at present situation with the suggested fare structure. If the daily commuter numbers increase to 40 lakh, then BEST’s annual revenue can rise to Rs3,250 crore, and if it increases to 50 lakh commuters, the revenues will increase to Rs4,100 crore.
 
How to achieve this is a million dollar question. Are we looking for safe and comfortable mobility, or only revival of BEST, or possibly both? 
 
Before addressing this question, it would be well to keep certain additional data before us. The MMRDA’s CTS-2008 tells us that the suburban rail service carries about 75 lakh passengers per day. It also tells us that during the peak period, the commuters travelling on the suburban railway system number 3,60,000 passengers per hour (pph). However, the railway capacity is barely 1,80,000 pph. Because of overcrowding,  4,000 people die every year. Due to certain measures initiated by public interest litigation (PIL) and citizens’ pressures, this has come down by 10%. At that time, BEST carried 45 lakh passengers every day. Due to road congestion and other reasons mentioned earlier, the number of bus travellers has come down to 28 lakh.
 
To address that situation, a 146.5km Mumbai Metro Master Plan (MMMP) was conceived in 2004. However, the capacity it would provide was only 72,000 pph. Having taken eight years to complete the 11.4km of one line, the authorities have increased the lengths and capacity of Metro Plan in recent amendments to 172km and capacity to 98,000 pph, even as the need still is as high as 1,80,000 pph. There is now an ambitious plan to complete this in six years’ time. There are several reasons why this is unlikely to happen and therefore we must prepare for the worst scenario. This simply means that we must keep before us a target of public transport that has the capacity of 2,00,000 pph.
 
One of the way to improve the speeds of BEST bus service is to operate buses in a bus-only lane. To prevent non-BEST bus vehicles using this bus-only lane, the 5,000 conductor staff, who now would be issuing tickets or the 24HourPass at the bus stops, could be tasked to take photographs of defaulting vehicles and let e-challan system of Traffic Police do the rest. True, not all city roads can have a bus lane, but these would be short stretches hence affecting only marginally in slowing down of buses. This itself is good enough to attract back some of the commuters. If a BRTS network is provided instead of just Bus-only lanes, not only would the needed capacity of 2,00,000 pph be achieved, but speeds could be between 30kmph to 40kmph, as has been achieved in Bogota, the capital of Columbia. 
 
Taking all these into consideration, the following steps could be initiated by stakeholders such as Government of India, BEST, Municipal Corporation of Greater Mumbai (MCGM), Government of Maharashtra and its bodies such as Mumbai Metropolitan Region Development Authority (MMRDA), Maharashtra State Road Development Corp Ltd (MSRDC), Public Works Department (PWD) and Mumbai Metro Rail Corp Ltd (MMRCL), who are supposed to be collectively concerned with mobility, environment and quality of life of every citizen.
 
1. Every vehicle has to go to fuel stations. At these fuel stations a photograph of the vehicle number plate will be clicked, which will get sent automatically to the Traffic Police/RTA and check on violation of traffic rules and same shall be given to the car owner / driver as a consolidated challan and the fines recovered along with the payment for fuel. This will be linked with the e-challans being issued by the Mumbai Police. Repeat violations should get publicised to let people to know that punitive actions are being taken. Of course, this is part of Traffic Police, the RTA and arrangement with the fuel stations.
 
2. Get the 24HourPass scheme started. Sale of 24HourPass will be only at bus stops, where one could also get the Rs8 and Rs10 tickets issued. These would be sold by Bus Conductors who will no longer travel in the bus in accordance with the suggested scheme. The 24HourPass will have to be issued on any government or BEST issued photo id whose number would get printed clearly and so also the pass expiry time.
 
3. In addition to the sale of 24HourPass, the conductors stationed at bus stops will take photographs of any vehicle that is parked or travelling on the bus lane and automatically it would get forwarded to the BEST HQ for records and the traffic police and the RTA for taking further action. This could be linked with the Mumbai Police e-challan scheme introduced recently
 
4. Provide bus lanes wherever possible keeping in mind that by providing this the buses will travel more speedily, will be able to have higher frequency and carry more people per hour. Conductors will monitor that these Bus-only lanes will be used by buses only as described above.
 
5. Revoke the share taxi and auto scheme and decongest the station area of the autos and taxis. Only auto or taxi that is hired by individuals will be allowed to ply in Greater Mumbai. The last mile connectivity from bus stops to final destination could then be by walk or auto or taxi depending upon distances from the bus stop.
 
6. Design roads with primacy given to pedestrians and interfaces between walking and other modes of travel, especially public transport and para-public transport. Design shall be to permit non-motorized transport vehicles to travel safely and causing minimal hindrance to faster moving vehicles on primary roads such as express highways and link roads.
 
7. Create a network of BRTS that will collectively provide an hourly capacity of 2,00,000 pph in the North-South directions.
 
Railways have already reached their full capacity in the present state of their infrastructure and cannot augment their capacity significantly and quickly. BEST can ween away as many as 35 lakh railway commuters by adopting a comprehensive BRTS. This would mean that there is a potential to carry as many as 75 lakh persons per day. If achieved, the revenue could be as high as 75lakh/day x 300days x Rs25 + 25 lakh/day x 65days x Rs25 = Rs562,500 lakh + Rs40,625 lakh = Rs603,125 lakh = Rs6,031 crore/year.
 
The above computations and the ones in earlier parts do indicate that the targets of (i) providing adequate public transport capacities, (ii) addressing the annual casualties of 3,600 on suburban railway system, (iii) providing safe and comfortable and speedy road public transport, (iv) resurrecting BEST are quite achievable. Does it not demand that the suggested scheme of 24HourPass and BRTS be considered seriously? This is where the will of the decision makers to move away from the conventional conservative approach of increasing bus fares and curtailing existing concessions and subsidies comes into picture. 
 
(Sudhir Badami is a civil engineer and transportation analyst. He is on Government of Maharashtra’s Steering Committee on BRTS for Mumbai and Mumbai Metropolitan Region Development Authority’s Technical Advisory Committee on BRTS for Mumbai. He is also member of Research & MIS Committee of Unified Mumbai Metropolitan Transport Authority. He was member of Bombay High Court appointed erstwhile Road Monitoring Committee (2006-07). While he has been an active campaigner against Noise for more than a decade, he is a strong believer in functioning democracy. He can be contacted on email at sudhirbadami@gmail.com )
 

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SBI bad loans balloon, post-merger provisioning may rise
New Delhi, State Bank of India's bad loans have ballooned approximately 50 per cent in the span of a year and those of its five associate banks by 170 per cent.
 
The bank will likely have to increase its provisioning for bad loans -- setting aside money to partly cover the non-performing assets (NPAs) following its merger with five subsidiaries.
 
SBI, which had a provisioning coverage ratio of about 59 per cent, said that after the merger it will revisit the NPAs and provide accordingly.
 
"Depending on the age of NPAs, we provide provisioning as per the norms. Hundred per cent provisioning is not a practice in the industry," SBI Managing Director Dinesh Kumar Khara told IANS.
 
SBI's gross NPAs in December 2016 were at Rs 1.08 lakh crore, an increase by 48.6 per cent from Rs 72,792 crore in the third quarter FY16. The bank's net NPAs rose by 52.6 per cent during the same period.
 
SBI's five associate banks reported a 172.8 per cent increase in gross NPAs at Rs 55,164 crore in December 2016, as compared to Rs 20,218 in the same period in 2015-16. The net NPAs of these rose by 218.7 per cent in the same period.
 
The five associate banks with which SBI merged on April 1 were: SBBJ (State Bank of Bikaner and Jaipur), SBM (State Bank of Mysore), SBT (State Bank of Travancore), SBP (State Bank of Patiala), and SBH (State Bank of Hyderabad).
 
The Bharatiya Mahila Bank, which is not an SBI subsidiary, was also merged with it on the same day.
 
The combined gross NPAs of SBI and its five associate banks as on December 31, 2016, stood at Rs 1.6 lakh crore or 8.70 per cent of the total assets, while the net NPAs were at 5.33 per cent.
 
"As far as the corporate books of associate banks are concerned, we started converging the NPA books of corporates from September quarter; so I don't envisage any surprises on that," Khara said.
 
The Reserve Bank of India had asked the banks to clean up their balance sheets and had given a deadline of March 31 for asset quality review. Kumar said that SBI has been continuously declaring NPAs; so there will not be any extraordinary rise in the fourth quarter of 2016-17.
 
SBI Managing Director Rajnish Kumar told IANS, "We have been declaring NPAs from time to time. I don't expect any extraordinary hike in NPAs. The formation of NPAs has slowed, that is the fact, though we are still not out of the woods as of now."
 
From time to time there are meetings at the level of the government or Indian Banks' Association to find an acceptable solution as the recognition of NPAs has happened in the last two years, Kumar said.
 
"All have realised the problem and are trying to work together to find a solution that is acceptable to all. NPA problem is (because of) corporates, or rather mid-corporates," he added.
 
He said that the NPAs would get reduced if the economy grows at a fast pace and profitability of stressed sectors sees an improvement.
 
"For resolution of NPAs, the profitability of corporates should increase. For example, the steel sector has now suddenly started showing up, because there is an improvement in the profit margins. It is because of the pressure on the margins that the debt becomes non-sustainable. But if EBIDTA (earnings before interest, depreciation, taxes and amortisation) margins improve, synergy improves, problem would at least be partly solved," Kumar said.
 
Khara, however, said that the idea of bad bank could be considered, not as a repository of bad assets, but with the aim to turnaround these assets.
 
"There are some insolvency professionals coming in. But by the time the ecosystem gets created and starts delivering... it is still some time away. That kind of vehicle to identify such assets which can be turned around is needed," he said.
 
SBI has committees for NPAs depending on the size of the loans. There is also a committee under the bank chairperson which looks after stressed assets worth Rs 500 crore or more. Similarly, there are committees that regularly review NPAs and decide on the future course of action.
 
After the merger, SBI, with a customer base of 450 million, has about a quarter of all outstanding loans of the banking sector.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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COMMENTS

Sudhir P Badami

3 months ago

This is Part 2 of two part article

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