The Rs 43,000 cr loan waiver: Is Andhra becoming graveyard of PSU banks?

After the Rs 70,000 crore farm loan waiver in 2008, Indian state-run banks are set to bear the burden of yet another politically sponsored loan waiver programme.

The newborn twin states-Andhra Pradesh and Telangana-are set to implement the poll bonanza promised by their political heads to their voters during recent elections. W hile Andhra Pradesh cabinet had officially approved the Rs 43,000 crore loan waiver , the Telangana is busy cutting out the final structure of the waiver that could run into several thousand crores.

The key differences between the 2008 loan waiver and the new one is this: The new round of waivers are sponsored by two chief ministers - Telugu Desam Party chief N Chandrababu Naidu and Telengana head K Chandrasekhar Rao - unlike the past one that was primarily sponsored by a central minister (P Chidambaram). Even though the waiver is a state-specific affair, its size is more than half of the total amount of loans waived in 2008.

But the one thing in common between the two - the potential to kill the credit culture of a large number of good borrowers with a single stroke - is what that could prove fatal to state-run banks.

Post the announcement of the waiver, even the good borrowers have stopped paying back money to banks, already leading to stress signals on the books of state-run banks, which have an exposure to them.

One can’t blame them. When freebies are offered, people tend to pounce on them to have their share. That has happened in the past and is happening here too.

“Why should they? Anyway, all loans are going to get waived. What is it, if not foolishness, if one would try to be honest?” asks a senior banker, who spoke to Firstbiz on condition of anonymity.

That’s how it works; always. Loan waivers never helped the intended recipients. On the contrary, it has destroyed the credit culture of even the unintended target borrowers .

Several state-run bankers Firstbiz spoke to admitted that the situation was worsening with more and more borrowers happily joining the groups of defaulted borrowers. But none of them would speak on record for fear of the wrath of the finance ministry.

“This is something where you don’t have a choice,” said the chairman a state-run bank.

“It will destroy the credit culture, affect the good borrowers and surely has long-term impact on the credit history of all borrowers who are subjected to the waiver,” the banker said.

Going by media reports, farmers availed of loans until up to 31 March 2014, will get a loan waiver of up to Rs 1.5 lakh per family. This will include gold loans and loans given to self help groups (SHGs) as well. SHGs are small groups of women borrowers.

Remember, India’s state-run banks are already sitting on a pile of stressed assets - bad or restructured loans - which are a result of careless lending to risky segments for many years. State-owned banks are often used by politicians to implement the populist agenda and bear the burden of the resultant bad loans.

About 14% of the total loans given by Indian banks are stressed at this stage, which if let to grow beyond control, can risk the country’s Rs 86 lakh crore banking system.

Hanging questions

There are two critical questions that need answers here.

First, how will the Andhra government compensate the banks in the likely event of a waiver?

That’s a question which, probably, even chief minister Naidu wouldn’t know for sure.

On Monday, after a cabinet meeting Naidu told reporters that the government will set up a committee to mobilise funds primarily from future revenue receivables of the state and float bonds to investors to raise additional funds. But, timely reimbursement of subsidies to state-run units is a promise broken by many state governments in the past. Take the case of reimbursements to loss making state electricity units.

“We are financially in dire straits but we will honor our commitment by any means,” Naidu said.

Naidu is right. Andhra is struggling with significant fiscal stress. Post the partition, the residual Andhra Pradesh is left with a fiscal deficit of Rs 15,000 crore - something it has to live with until the Centre, which too is fiscally strained, offers an aid to bridge this gap.

For the fiscal year 2014, the Andhra Pradesh government estimated tax revenue receipts of Rs 72,443 crore and Rs 15,394 crore from non-tax revenue receipts. After filling an existing fiscal gap of Rs 15,000 crore, how much the state can pay to banks and in how many years?

If banks are compensated by the government for their likely losses through cash payments, say, within a year, then it wouldn’t hurt the books of state-run banks. On the other hand, if the payment is planned by way of bonds of say, 3-4 years of maturity, then that could be a big drag on their book, depending on the yield offered and maturity.

Among the state-run banks, Andhra Bank has the largest exposures to farmers in the state - about Rs 20,500 crore. “This (the waiver) is going to be irrational and damaging,” said Vaibhav Agrawal, vice-president, research at Angel Broking in Mumbai.

Second, how will the state government address the impact of the loan waiver on the credit culture and future credit worthiness of the borrowers?

In anticipation of a waiver, many borrowers in Andhra Pradesh have already stopped paying back to banks. These farmers are most likely to get into the defaulter list of credit bureaus, which, in turn, would mean that getting further loans will be difficult for them.

The dangerous part is this. Andhra Pradesh is a state where the credit culture of several millions of borrowers have already deteriorated sharply in the aftermath of the 2010 microfinance crisis, when the state promulgated a law to control microfinance institutions following suicides in the state allegedly due to coercive recovery practice of microlenders.

More than the crisis, a state-wide political campaign launched by Andhra politicians then asking people not to repay their loans, had proved disastrous, resulting in huge losses to the tune of about Rs 7000 crore to banks. This chunk is yet to be recovered from Andhra even after four years of the crisis.

The bottom-line is this: Loan waivers have never succeeded in empowering the poor anywhere in the world. Both Andhra Pradesh and Telangana will be making a fatal error of judgement if they go ahead with the waiver.

If the intention of the governments is genuine assistance of the poor farmers, alternative ways should be worked out using the expertise of institutions like National Bank for Agriculture and Rural Development.

The other way wouldn’t work. It has never worked, and can even take the poor to deeper troubles. Populism shouldn’t prevail over prudence.