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RBI to AP, Telangana: No debt to write off farm loans

Asks states to pay banks in cash; waivers may turn non-starter

Written by George Mathew
Mumbai | July 7, 2014 1:41:35 am
The banks have not been officially informed about the scheme so far. The banks have not been officially informed about the scheme so far.

The Reserve Bank of India has made it almost impossible for state governments like the new Andhra Pradesh and Telengana to offer farm loan waivers. The central bank has told them they will have to reimburse banks in cash if they wish to waive loans for any segment.

RBI Governor Raghuram Rajan is learnt to have informed the Telugu Desam Party-led government of Andhra Pradesh and the Telangana Rashtriya Samiti-led government of Telangana that the reimbursement to banks by the state treasury cannot be through issue of bonds which will be redeemed in future.

A top level source in RBI said, “The state governments will have to pay direct cash to banks on behalf of the farmers as loan repayment. There is no question of the central bank favouring a bond issue by the state governments to banks as part of loan waiver.”

While this has been conveyed to the states which have approached the RBI recently, the banks have not been officially informed about the scheme so far.

The tough stand by the RBI could make the proposed loan waiver schemes non-starter. Andhra Pradesh Chief Minister N Chandrababu Naidu had proposed it instead of direct cash payment as his government is running a revenue deficit and so is not in a position to make a cash payment.

Total farm loans in the undivided state is about Rs 1.37 lakh crore with the successor Andhra Pradesh accounting for around Rs 87,000 crore of it.

In 2008, the UPA government came out with the Agricultural Debt Waiver and Debt Relief Scheme, under which Rs 71,000 crore of farm loans were written off. The Central government compensated the banks over a period of three years by issuing bonds.

The RBI has written to the two states pointing out that a blanket loan waiver benefits only defaulters and maintained that a waiver should instead be targeted at those who are economically distressed for reasons beyond their control.

The RBI letter spoke about the spoiling of credit recovery culture and impairing of the “financial soundness” of banks.

The RBI is worried about a loan waiver on several counts. One, it will impact the repayment culture in the system. Andhra Pradesh farmers have already started defaulting on their loans after the announcement on loan waiver by the current ruling  party — TDP — in the state before the elections.

Secondly, the RBI fears that similar demands will come other states —especially states which are going into polls.

Thirdly, gross NPAs of banks have already hit the 4.4 per cent mark. The RBI is also worried that it will run a massive bonds programme from the Centre and states this year and any addition like loan waiver bonds will make bond prices slip massively.

Many bankers have openly come out against the loan waiver scheme. State Bank of India chairman Arundhati Bhattacharya recently spoke against such a scheme, saying that “stress in our agri portfolio in Q1 will not be so much because of the monsoon deficit as that does not translate into stress so quickly, but definitely on account of the proposed debt waiver, yes”.

Another top banker said the loan waiver scheme will not work out without the support of the Central government. “If the Central government steps in, then PSU banks will have to fall in line.”

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