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Thursday, June 30, 2022

In fact: The unwavering attraction loan waivers hold for govts

The Financial Sector Legislative Reforms Commission or FSLRC has suggested a prudent way out for any government to support any sector — setting aside funds in the Budget, and paying banks for subsidising these.

Written by Shaji Vikraman |
Updated: April 5, 2017 6:07:53 pm

In February 2008, the UPA government finalised a proposal on waiving farm loans, to be incorporated in that year’s Budget. The proposal had been discussed at the highest level politically — and in the 2008-09 Budget, a year before general elections, Finance Minister P Chidambaram announced a full waiver of dues up to March 31, 2007 for 3 crore small and marginal farmers, and a one-time settlement scheme for all others, with a 25% rebate thrown in. The value of the loan waiver was pegged at Rs 50,000 crore; that of the settlement scheme at Rs 10,000 crore.

But when the write-off came up for discussion with the Reserve Bank of India, there was resistance. An across the board write-off would be a departure from the principles of banking, and would hurt banks, it was argued. An agreement was worked out after a meeting of Prime Minister Manmohan Singh, Finance Minister Chidambaram and RBI Governor Y V Reddy. Rather than forcing banks to take a hit (many banks had, in fact, made provisions for bad loans), the solution lay in the government setting aside funds in the Budget over a couple of years. The central bank agreed informally to transfer a higher amount to the government to help ease the burden. The step did appear to help the government sell its inclusive growth mantra and boost the UPA politically — the coalition returned to power in 2009, and the farm loan waiver was cited as one of the reasons for the victory.


The move was criticised for vitiating the credit culture in the country, and the scheme was perceived by many as a virtual invitation to default. An audit by the Comptroller and Auditor General soon afterward indicated that 1 out of 10 farmers who were eligible under the waiver scheme could not fully avail of it. In those days marked by an average economic growth of over 8%, and high loan growth and profitability, local banks didn’t suffer much damage.

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It wasn’t as though only the UPA was guilty. In 1990, in keeping with election promises, V P Singh’s government announced an agricultural debt relief scheme of up to Rs 10,000 for each borrower, with the write-off totalling Rs 10,000 crore. Singh’s Deputy Prime Minister was farmer leader Devi Lal who, as Chief Minister of Haryana, had announced a write-off of farm loans by banks and co-operatives aggregating Rs 227.5 crore, of which Rs 162 crore was due to commercial banks.

The cue for much of this came from Congress governments of the 1980s. In the early 80s, and later in 1986 and 1987, Minister of State for Finance B Janardhana Poojary went on an aggressive drive to disburse loans to thousands of small borrowers in loan melas. Poojary and his officials forced hundreds of bank branches to give loans to borrowers who had been identified, in many cases, by local Congressmen without assessing their creditworthiness. In one loan mela, a target of 1 lakh loan applications was given to bankers, based reportedly on lists prepared by the party at the local level. The drive was taken to absurd lengths — bankers in some places were forced to go in a procession to publicise loan melas, and those who resisted were threatened with transfers to the Andaman and Nicobar Islands or the Northeast. Poojary, who represented Mangalore in Lok Sabha for several terms, remained undeterred by protests in his home state, where nominees of the opposition Ramakrishna Hegde government were kept out of the loan melas.

As both central and state governments went about writing off loans for political gains, the RBI indicated that only banks themselves could waive loans — and that defaults, and problems in the recovery of dues, would affect the credit system. As Haryana announced a loan write-off, Governor R N Malhotra, who had succeeded Manmohan Singh in 1985, warned of the negative impact on credit culture and delivery. It appeared to have had little effect, however. Tamil Nadu too joined the bandwagon — and after Chief Minister M Karunanidhi’s government had waived the interest component on loans to farmers, the rival AIADMK government went one up by announcing a waiver of both interest and principal.

All this populism forced the central bank to come up with the ‘service area approach’ to provide some protection to banks in 1988. A group of villages falling under the rural or semi-urban branches of commercial banks was identified, and each branch was allocated 15 villages with credit plans for activities in their areas. It was seen as an attempt to thwart the Poojary style of loan disbursal, and help banks fight political pressure.

In 2014, the announcement by Telangana and Andhra Pradesh on waiving farm loans again threatened to hurt the portfolios of banks. The Telugu Desam Party, which is in power in Andhra Pradesh, was hoping to leverage its relationship with the Narendra Modi government at the Centre, but the State Bank of India took a clear stance of refusing any forbearance on write-offs or defaults. SBI chief Arundhati Bhattacharya had meetings with RBI Governor Raghuram Rajan who backed the bank, and the Indian Banks Association — the lobbying arm of local banks — presented an united front against the demand for waivers. The state governments were forced to retreat, and provide partly for the waiver.

The Financial Sector Legislative Reforms Commission or FSLRC has suggested a prudent way out for any government to support any sector — setting aside funds in the Budget, and paying banks for subsidising these. The Poojary style of cowboy banking may no longer be kosher.


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