Andhra budget silent on farm loan waiver, Naidu may have no escape from his trap

With the Andhra Pradesh budget, announced on Wednesday,remaining stoicallysilent on howto deal with Chandrababu’s Naidu’s poll promise of a massive loan waiver for farmers, chances are that the chief minister might be embracing one of the toughest and immediate political challenges in his political career in the southern state.

The Rs 1,11,824 crore budget for 2014-15 doesn’t have any specific provisions for the proposed waiver, estimated to be around Rs 1,21,000 crore by bankers. Naidu has promised a waiver for not just farm loans but also loans against gold by thousands of borrowers.

Banks are not keen to go for yet another round of loan waiver since the scheme doesn’t have the backing of the Reserve Bank of India. The central bank has categorically refused to permit special dispensation to banks to go ahead with a state-wide waiver since it fears such an exercise will impact the credit culture of a large section of borrowers.

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In fact, people have already stopped paying back loans to banks in anticipation of the loan waiver .

Bankers have made it clear that they are willing to go for the waiver only if the state government is willing to compensate them through cash payments and not bond issuances.

The silence of budget on the required provisions, indicate that the state government doesn’t have a plan to execute the poll promise. State Bank of India chairman Arundhati Bhattacharya told FirstBiz that there is no understanding between the state government and bankers yet on the proposed waiver.

Going by the budget, the state has an estimated revenue deficit of Rs 6,064 crore and fiscal deficit of Rs 12,064 crore. Earlier, Naidu had promised to go ahead with the waiver betting on the future receivables of the state.

But, given this deficit gap following the bifurcation of united Andhra Pradesh to residual Andhra Pradesh and Telangana, the state is in a tough position to manage its own finances, let alonethe waiver.

That leaves Naidu in a tight spot.

“The loans have also grown after the announcement. So, when the promise was made, they did not know the magnitude of the problem,” said Andhra Bank chairman CVR Rajendran in an interview to The Economic Times on 18 August.

Naidu is ridinga tiger and it is difficult to get off unless some miracle happens, in the form of assistance from the Centre.

As Rajendran said in the interview, Naidu didn’t have a clue on the actual chunk of agricultural loans in the state, when he announced the waiver. He went by the numbers of the past and estimated the size of possible loan waiver at about Rs 10,000 to Rs 12,000 crore, whereas the actual number comes to about Rs 1.2 lakh crore.

The bitter fact is that no one gains from a waiver. A waiver destroys the credit culture of a large section of borrowers the moment waivers are announced. People stop paying. It also hurts the very beneficiaries of the waiver because once their loan is written off; no bank is going to give a loan to these borrowers for next several years.

In fact, most state-run banks have reported a rise in their bad loans from agriculture loans in the southern state in the June quarter, following the waiver announcement. The most affected lender is Andhra bank, which witnessed its gross non-performing assets (NPA) hitting 5.98 percent of total loans, with the bank classifying agriculture loans worth Rs 1,076 crore as NPAs. Typically, the lenderhas around 2.5% farm loan NPAsbut the chunk rose around three times in the June quarter.

Remember, Andhra Pradesh is a state, where about a crore borrowers are defaulters to microfinance companies in the aftermath of 2010 microfinance crisis, when again politicians asked people stop paying back.

Naidu has done a blunder by committing a waiver to gain votes. A trap, from which there is no easy escape.