The Reserve Bank of India (RBI) has turned down a proposal to ease norms for farm loans that have turned bad and have been classified as non-performing assets (NPAs) besides declining to provide for a special dispensation for bad loans that were restructured in the past. This is being perceived as a setback to the Maharashtra government which announced a Rs 34,022-crore farm loan waiver scheme.
According to official records, such loan accounts make up for nearly 67 per cent of the total farm loan waiver benefit. With rural banks reluctant to advance fresh crop loans to such accounts without the RBI lowering the provisioning norms, the Devendra Fadnavis government approached the banking regulator on July 10 for a special dispensation.
But RBI’s Executive Director Sudarshan Sen wrote back on August 7 declining this request.
Sen’s letter, a copy of which this newspaper has reviewed, states, “While the grant of loans to overdue/NPA accounts is not barred, these are purely commercial decisions to be taken by the banks in which the RBI won’t intervene. Further it will be appreciated that where the existing accounts of borrowers are NPAs, or were NPAs that were subsequently settled by the bank at a loss, it is necessary for the bank to recognise the uncertainty of the repayment associated with the account and classify and provide for it accordingly. In view of this, we are unable to grant any special dispensation for such cases.”
The RBI’s refusal to ease norms would mean that rural banks, especially state-run banks and the banking cooperatives, who are already sitting on a huge pile of stressed assets, will have to bear an additional burden and make higher provisions if they were to extend fresh crop loans to such farm accounts as per the government’s proposal.
With debt mounting, the Maharashtra government has proposed to the State Level Bankers Committee that fresh crop loans be advanced to such defaulting borrowers pending repayments for the arrears. It has proposed to use taxpayers’ money to write off arrears in three or four annual installments.
But a senior government official admitted on Friday that the RBI’s refusal to reclassify NPA accounts and permit lower provisioning would now make it difficult for banks to accept such a proposal.
The Chief Minister had earlier declared that the government’s farm loan waiver scheme would benefit 89 lakh farmers in the state. Official records show that NPA accounts and the restructured loan accounts made up for 24.01 lakh farmers. Farm loans totalling Rs 12,629 crore in the state have turned bad over the years. Another Rs 10,001 crore bad loans have been restructured.
Another component of the government’s loan waiver scheme dealt with advancing short term loans of Rs 10,000 against the state’s guarantee to farmers whose accounts were overdue or had turned into NPAs as on June 30, 2016. The government has proposed that this amount would later be adjusted against the amount of the waiver or incentive admissible to a farmer under the loan waiver scheme.
While the RBI has agreed to make a special dispensation in this case, it has imposed riders. “We are agreeable to have the Rs 10,000 loan (to NPA farmers) classified as ‘standard’ to begin with, provided the Government of Maharashtra first identified and advises the concerned banks regarding the farmers to be given these loans and advises the RBI regarding the aggregate amounts of such loans,” Sen’s letter states.
Besides this, the banking regulator has also sought an undertaking from the government that the aggregate amount of these loans and the interest payable on it would be adjusted from the government’s own resources on or before December 31, 2017. It has sought authorisation from the government to recover the amount by debit to the state government’s account (with the RBI) and remit it to the concerned banks if the government’s fails to meet the December deadline.
RBI governor Urjit Patel had earlier warned that farm loan waivers could create a moral hazard besides posing interest rate risks.