Loan Waivers Damages Credit Culture and Increase Indebtedness of Farmers: SBI
The newly formed Maharashtra government has announced a loan waiver of up to Rs2 lakh for farmers, with a cut-off date of 30 September 2019 and providing relief to non-defaulting farmers who have a loan of above Rs2 lakh. Such loan waivers damages the credit culture and results in an increase in indebtedness of farmers, says a research report.
 
In the report, Dr Soumya Kanti Ghosh, group chief economic adviser of State Bank of India (SBI) says, "Typically, the farm loan waiver amounts are cleared in several yearly instalments to banks by respective state Governments and thus the existing kisan credit card (KCC) accounts continue to be NPA category till the date of final receipt of the waiver amount. In Madhya Pradesh, for example, the total amount cleared in first year is close to 10%. This invariably results in a situation where states that have granted loan waivers witness farmers having lower access to formal loans and hence higher indebtedness and thereby declining agricultural productivity. In FY2018, Maharashtra, Karnataka and Punjab had announced farm loan waiver, and during the same year, the growth in fresh loan disbursement was -40% in Maharashtra, 1% in Karnataka and 3% in Punjab."
 
 
Notwithstanding the economics, Dr Ghosh says, the politics of loan waivers typically veers around the fact if the banks can write off non-performing assets (NPA) of the industry, why not agri farmers. However, he says, "Such arguments are mischievous and frivolous. For example, even though agriculture NPA is Rs1.1 lakh crore or 12.4% of overall NPA, we also need to account for Rs3.14 lakh crore loan waiver announced in the last decade. Hence, logically, agri NPA or burden for the exchequer and banks could be as much as staggering Rs4.2 lakh crore. If we add the potential Maharashtra loan waiver amount, it could be at Rs4.7 lakh crore or 82% of industry NPA!"
 
 
"The new insolvency law now ensures that the defaulting company loses stake apart from market penalising in terms of adverse price discovery between a good and a bad borrower. However, for the farm loan waiver, the poor farmer ends up as the loser with a significant increase in indebtedness as loan waivers binds the farmer in debt pangs and the only solution is a new loan waiver!" the report says.   
 
"We must shun loan waivers and build measures to address rural woes," Dr Ghosh says, adding, "These could be done by the government and Reserve Bank of India (RBI) in unison. Firstly, we must build competitive and inclusive value chains for food products. Secondly, implement the model agricultural produce and live stocks marketing (APLM) act of 2017, which will help in removing the entry barriers.
 
Thirdly, we are not sure what has happened to the suggestion of providing a tenancy certificate to tenant farmers as was promised in the Budget 2018. We must do it on a war footing."
 
"Fourthly, removal of Hypothecation Charge on Crop Loans. Fifthly, the KCC scheme must be revamped. A combination of revolving credit like share 40% and term loan with 60% share with flexibility of payment could be introduced in lieu of the current KCC scheme. We believe that the monthly income of farmer will go up by 35% simply by revisiting the current KCC norms by the RBI. Let us all make a rule to shun populism for the agri sector, "he says.
 
 
According to SBI, going by Maharashtra's previous experience on farm loan waiver, this time the cost could be at least Rs45,000 crore, even hypothetically assuming that the farmers who will get the maximum benefit and complete loan waiver are unchanged from the last loan waiver. There are 1.37 crore farmers in Maharashtra. 
 
It says, "The cost could go up to Rs51,000 crore if the number of farmers covered increases from the current levels. The cost could come down by Rs12,500 crore if the new dispensation decides to postpone the payments outstanding under the earlier loan waiver scheme into the new one or decides to limit the coverage of farmers under the scheme."
   
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    COMMENTS

    B. Yerram Raju

    11 months ago

    It is not for either GoI or RBI or both together to take a call as much as Parliament and Legislatures or the Chief Election Commissioner. Loan waivers as an election slogan when stopped the evil has potential to vanish.
    Second, even Chanakya in Artha Sastra considered loan waiver by the government as valid when there is erosion in the wealth of the farmer with natural calamities. The measure by itself is in order if there is total loss of assets for the farmer in drought, floods, cyclone, earthquakes and holocausts. The waiver is through the exchequer and not through the Bank.
    Third, if the Banks had lent the farmer not by the ordain of the Union Budget but by themselves, the evil would not have occurred. There is collapse of institutional mechanism in lending to the farmer whose production is locked up either in land or stock right when cash is required. Banks rush to lend to big farmers and farmers in cities and only walk slowly to the farmer. Farmers hardly realize that they are walking into the trap of the money lender most of whom are the politicians who ask for votes, with the failure of institutional lending mechanism.
    Farmers cannot be lent without extension and viewing all his requirements - as every small and marginal farmer invariably holds milk animals, a few birds, may be a fish pond if he is in coastal area, and a silo. Comprehensive view of farmer has capacities to cross-hold lender's risks but hardly such view is taken with the type of over-emphasis and hackneyed approach to crop loans.
    The article is at best an arm-chair view of a lender!!

    REPLY

    ksrao

    In Reply to B. Yerram Raju 11 months ago

    Even though the waiver is through a bank, ultimately it is through the government, isn't it, and through deficit financing if tax money with the government is not enough.
    But as Dr Yerram Raju says, we are not taking a comprehensive view of the farmer's requirements. And where write-off or write-down is required, we are not taking into account the natural factors like lack of rain, production and marketing facilities, and what can be done to mitigate them but are swinging into loan waivers to fulfill the politicians' electoral promises. Economists have failed to discover methods of providing relief to farmers other than periodical loan sops.
    -Dr KS Rao, from Cupertino, California.

    Sandeep More

    11 months ago

    So true. However, most of smaller farmers are so uneducated that they are unable to understand the mod techniques, leave alone the implementation part. So they go for loans to meet the working capital needs.

    If the soil does not have the nutrients, the TOUCH ME NOT PLANT fixes the same. However, the farmers consider this useful plant to be a weed and burn it, the moment they spot it. Cow dung could be a supplementary option.

    Storage facilities r missing. So, the middleman apparently helps the farmer even though the produce has to be sold at a pittance. The MNCs could buy the produce at a remunerative rate from the farmer but the middlemens lobby is too strong to make a meaningful penetration.

    The loan waiver would ultimately prove to be disastrous for our nation. It discourages sincere efforts and that day would not be too far when we might have to import agricultural produce while at the same time waive away the loans too without much productivity.

    REPLY

    Sandeep More

    In Reply to Sandeep More 11 months ago

    Our concentration and efforts should be to eliminate the cause of the problems through innovation and sustainable solutions rather than keeping the farmers on ICU through LWs

    Dr.Dhananjaya Bhupathi

    11 months ago

    https://www.moneylife.in/article/loan-waivers-damages-credit-culture-and-increase-indebtedness-of-farmers-sbi/59079.html
    1. “Notwithstanding the economics, DR Ghosh says, the politics of loan waivers typically veers around the fact if the banks can write off non-performing assets (NPA) of the industry, why not agri-farmers. However, he says, "Such arguments are mischievous and frivolous”.
    2. I do not agree with the enlightened view of DR.Ghosh. SBI management writes off NPAs worth INR.Trillions every year; lent by its Board + apex level functionaries [CMD/CEO/EDs]. SBI with moral support from RBI, callously, keeps the details to its chest in violation of various SC Judgments. It is the same case with all PSBs. These huge sums of money are not their grand-pas’ properties. Why can’t GOI+ RBI plug such loopholes in the Banking industry to prevent the flight of Indian Wealth outside Indian borders through the fugitives?
    3. “We must shun loan waivers and build measures to address rural woes," DR.Ghosh says, adding, "These could be done by the government and Reserve Bank of India (RBI) in unison. Firstly, we must build competitive and inclusive value chains for food products. Secondly, implement the model agricultural produce and live stocks marketing (APLM) act of 2017, which will help in removing the entry barriers.
    4. I, fully, agree with DR.Ghosh. Whatever, the Executive indulges-in to prevent the farmers’suicides, it is fine.
    5. https://www.youtube.com/watch?v=4Si8U02s8cQ.
    6. SATYAMAEVA JAYATHE!!!.


    S Balakrishnan

    11 months ago

    Mr Ghosh might like to ponder on the foll
    1 corporate bad debts of banks are Rs 10 lakh cr thereabouts 2.5x or more of agri exposure
    2 a good percent of big business loans has been siphoned out into private pockets
    3 has mr ghosh come across any farmer with a Swiss bank account?
    4 despite agri bad loans, overall agri supply and Stks areextremely comfortable.
    A contrast to mothballed power projects,roads,airlines,etc

    Intellectual honesty has never been the strong suit of economists

    S Balakrishnan

    11 months ago

    In principle all loan waivers are bad.
    But This chap's bank has the terrific record of converting debt to equity in a wind power co and a now defunct airline whose promoter slipped abroad. God knows how many other similar cases.
    Both were done at 'average mkt price' using for justification a sebi rule which applies only to normal situations not distress cases.
    Predictably both conversions are worthless. Does he realise it's public money invested in garbage.?And did he as the in house 'economist' have anything to say when his bank took these decisions. If not he's either incompetent or gutless.
    Today's paper says the wind power co will get another debt write off. Unbelievable.The promoter argues the co is not viable if tariffs are to be competitive. So he wants indefinite subsidy and still wants to run the co after multiple failures.any thoughts mr ghosh?
    I hope this guy focuses on the total mess in his bank instead of pontificating.

    States’ Aggregate Fiscal Deficit To Rise to 3% of GDP in FY2020: Ind-Ra
    The aggregate fiscal deficit of states in India would touch 3.0% of gross domestic product (GDP) in FY19-20 as against the budgeted figure of 2.6%. This fiscal slippage will originate from a decline in tax revenue, lower nominal GDP and higher expenditure, says a research note.
     
    In the report, ratings agency India Ratings and Research (Ind-Ra) says, "While states in aggregate have budgeted Rs8.5 trillion as their share in central taxes, the union government has budgeted states’ share at Rs8.1 trillion in the FY2020 union budget. Even to meet the Rs8.1 trillion target, central taxes will have to grow at 15.1% during the rest of FY2020 or between November 2019-March 2020, which looks unlikely." 
     
    In aggregate, Ind-Ra says, states' have budgeted Rs30.97 trillion in the total revenue for FY19-20 compared with Rs28.10 trillion in FY2019, representing a growth of 10.2%. Tax revenue growth has been assumed to grow 11.5% as against budget estimate or Rs22.15 trillion and revised estimate of Rs19.87 trillion for FY18-19. 
     
    States’ tax collections fall under three different revenue heads – states’ own tax revenue (SOTR or  state goods and service tax—SGST), share in central taxes (central goods and service tax—CGST) and grants received as compensation for GST. 
     
    SOTR remains the dominant contributor to the state revenues with 44.0% share in the total budgeted revenue in FY19-20 as against revised estimate of 43.7% in FY18-19, followed by states’ share in central taxes at 27.5% of the budget estimate for FY19-20 and 27% of revised estimate for FY18-19.
     
    SGST is part of SOTR. Under the GST regime, states are assured of at least 14% annual growth in SGST collections and entitled for compensation from the centre, if their SGST collections growth is less than 14%. 
     
    About 12 states namely, Andhra Pradesh, Arunachal Pradesh, Kerala, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Telangana, Tripura and Uttar Pradesh have not budgeted for compensation cess from the centre in FY2020. 
     
    However, they may also witness lower SGST collection than budgeted due to the prevailing growth slowdown. The other major components of SOTR are: electricity duty and state value added tax on petroleum products. Growth of consumption of petroleum products at 2.2% in FY2020 so far during April to November 2019 is lowest in the past seven years (in FY13-14 it was 0.6%). Ind-Ra estimates the shortfall on account of SGST collection in FY19-20 could be Rs166.29 billion.  
     
    States’ share in Central taxes has been budgeted to grow 13.98% in FY19-20. However, it contracted 2.7% in FY19-20 (April-October 2019), exerting pressure on state’s fiscal deficit. 
     
    The state budgets presented in respective state legislatures, like Central government, have assumed 11% nominal GDP growth in FY19-20. But, nominal GDP growth in first half (1H) of FY19-20 was 7%. As the tax revenue growth moves in tandem with nominal GDP growth, state governments will face a significant shortfall in their tax collections from the budgeted level, the report says. 
     
    According to the unaudited finances of 23 states, April-October fiscal deficit now stands at 49.6% of the FY19-20 budgeted deficit (FY18-19: 39.5%). Based on the current tax growth, the overall shortfall in states’ revenue could touch Rs390.32 billion in FY19-20.
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    User 

    COMMENTS

    B. Yerram Raju

    11 months ago

    It is time to forget fiscal deficit at least for the time being if not for anything, because of the indeterminate GDP-fix.

    Challenging Year Ahead for Indian Economy
    McKinsey Global Research predicted in July 2019 that the future belongs to Asia. India and China would lead the growth, it said, going by the value chain measured in terms of the ratio of gross exports to gross output at 8.5%, together with emerging Asia’s soaring consumption and its integration into global flows of trade, capital, talent, and innovation. 
     
    Come December 2019, India’s disappointing growth and China’s disappointing external trade, following the US hegemony in international trade, would appear to water down the dream run predictions. Several rising corporates in India are mired in frauds, poor governance, and unethical approaches. Education and health have become matters of concern with inadequate access and high costs. Banks have hit headlines with scams and balance sheet blunders. I wish I would start on a more hopeful note. 
     
    Basing their conclusions on NSSO Employment Surveys for 2004-05 and 2011-12 and the periodic labour force survey for 2017-18, a research study by Mehrotra and Parida on Employment (New Indian Express, 6 November 2019) reveals that employment has fallen by 9 million in six years.  The agricultural sector leads the data on the decline in jobs by 27milllion and the manufacturing sector by 4 million. While the former could be attributed to structural change, it is the decline in manufacturing that is worrisome. The services sector showed an uptick to creating 17 million jobs, although their sustainability is uncertain.
     
    Growth in the agriculture sector has seen ups and downs and is currently running at just around 2 percent. Farmer suicides have been witnessed in some of the key producing states. Despite the launch of schemes such as the Pradhan Mantri Krishi Sinchayee Yojana (PMKSY), the national agricultural insurance, and the Pradhan Mantry Fasal Bima Yojana (PMBY), along with the national agricultural market (e-NAM) and digital initiatives, reforms in agriculture marketing remained nascent. Markets that were to reach the doorsteps of the farmers, with assured pricing of their produce, also remained elusive.   
     
    Though consumption-led growth strategy based on market competitiveness replaced austerity-led growth strategy since the embrace of liberalisation, privatisation and globalisation, it is only the automobile and pharmaceuticals sector that transited to becoming globally competitive. 
     
    The textile sector, particularly low value but with a high export capability, indicated that countries like Vietnam, Bangladesh and Thailand took the space vacated by China while we could not take advantage of it due to our unwelcome tariffs and duties. We have not been able to put in place an eco-friendly policy framework for making the sector export competitive. 
     
    Segments such as machinery and equipment, non-metallic minerals, IT hardware requiring more innovation and incubation, continued to lag despite the Make in India, Stand up India, and Start up India initiatives. The effect is that we moved to negative growth in manufacturing after facing temporary booms and busts. 
     
    Gaps between promise and performance have only been widening in both the agriculture and manufacturing sectors. Reforms in foreign direct investment (FDI), corporate tax concessions, the insolvency and bankruptcy code (IBC code), the real estate regulatory authority (RERA), the goods and services tax (GST) have all been tossing up and down to deliver. 
     
    While we have comfortable inflows in FDI with an attractive 2% current account deficit and a forex balance of $429 billion as at the end of November 2019, investment in core sectors did not happen. The slowdown in growth that we have been witnessing during the last few quarters as a continuum can be reversed.
     
    The economy needs a boost in public investments and private investments. Governments should spend more in the case of the former by identifying all the projects that are quick yielding. 
     
    Private investments should come in with the benefit that the corporate tax concessions already conceded and the triggers of the market mechanisms through the stock exchanges. Private investors, keeping an eye on global impacts, particularly, on the volatile commodity markets, should move in tandem with public investments and focus on deliverables to improve their sagging credibility.
     
    Growth impulses should be generated unabated to reach the targeted Rs5 trillion economy by 2022 and this would become possible only when we cross the 8% annual growth rate.
     
    Removing all forms of subsidies to the political constituency – legislators and parliamentarians, tweaking the farm subsidies to directly reach the cultivators and not just farmers; making lease markets more attractive for the micro, small and medium enterprises (MSMEs) to set up new units and ensuring that no viable manufacturing unit downs its shutters by suitably mandating the banks and establishing industrial health clinics in States that have a preponderance of sickness along the lines of the proven model of the Telangana Industrial Health Clinic; ensuring that banks and NBFCs enhance their risk appetite not through targets but through sensitising them to the economy’s imperatives. 
     
    These are the measures that need the finance minister’s attention. While the mergers of the public sector banks (PSBs) may leave fewer banks for the government to deal with, their thorough clean up and improving governance does not brook delay. But all these pose a real challenge in turning promise into performance quarter after quarter for the whole year. 
     
    There is leg room left in the tax-GDP ratio that the finance minister can take advantage of. GST has scope to increase in price-elastic products provided that the promise given to manufacturers on GST is greased through timely release of input tax credit. FM’s direction of the budget would decide her option. 
     
    In any case, cooperative federalism lies in taking the States on the same page as the Union government. In the current political controversies surrounding the National Population Register- National Register of Citizens (NPR-NRC) and the Citizenship Amendment Act (CAA) followed by the BJP losing the mandate of the people in the recent elections in Jharkhand, and with the State of Delhi going in for elections shortly, this Budget proves a big challenge both economically and politically.  
     
    If it is an austerity-led growth, the government should incentivise savings. Such savings get into the pool of investments when investments become more attractive than financial savings. If, on the other hand, the model is of consumption-led growth, the government should keep more money in the hands of the people. As of now financial savings are fast losing their lustre with falling deposit rates. 
     
    (Dr B Yerran Raju is author of the ‘Story of Indian MSMEs: Despair to Dawn of Hope’’ and an economist. The views are personal.)
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    COMMENTS

    Ramesh Poapt

    11 months ago

    catch 22 for govt!

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