Loan waivers: Andhra, Telangana farmers should wake up to see the trap laid by politicians
Reserve Bank of India (RBI) governor, Raghuram Rajan has yet again flagged caution about the effectiveness and real character of farm loan waivers — a tool time and again used by politicians to appease the poor farmers on the pretext of helping them.
The fresh caution has come in the backdrop of the latest round of debt waivers in the southern states of Andhra Pradesh and Telangana. Andhra Pradesh has promised waive of Rs 1.5 lakh per family, while Telangana too working on a similar scheme by waiving off loans upto Rs 1 lakh per farmer.
The total amount thus waived off will run into several thousands of crores, in turn, helping Chandrababu Naidu, chief minister of Andhra Pradesh and K Chandrasekhar Rao, his counterpart in Telangana, to
fulfill their key electoral promises.
The whole exercise has fatally impacted the credit culture of farmers turning them as bad borrowers forever, besides inflicting considerable damage on the balance sheets of public sector banks. These farmers may not be eligible to get a fresh loan in future and the banks will take serious hit on their earnings on account of the earnings.
Speaking at an event in Udaipur, Rajan asked a pertinent question. “How effective these debt waivers have been? In fact the studies that we have typically show that they have been ineffective. In fact they have constrained the credit flow post waiver to the farmers?"
Loan waivers offer a farmer temporary relief. He doesn’t need to pay up the dues to the bank and can be debt-free in an instant. That’s akin to the offer of devil. Even if one assumes that the waiver reaches the actual poor farmer, the good news for him ends right there. Post that day, he is practically a loan defaulter in the eyes of banks.
The next time the farmer goes back to the bank seeking a fresh loan, which in any case he will need to continue farming, the lender wouldn’t offer a fresh loan looking at his past credit history. This would apply to all farmers, whose names are mentioned in the loan waiver list.
The government that originally offered the loan waiver may or may not be in power at that time and the farmer is left helpless and ostracized from the formal financial system. The only option remaining for him will be to seek the assistance of the private moneylender paying him astronomical rate of interest and thus putting his life’s savings, land and honor at risk.
But the farmer unfortunately doesn’t realize this risk because it is human nature to grab freebies without a second thought. In the process even the good borrowers who used to pay back on time get into the bad list.
This is precisely what Rajan tries to warn. For banks too, this is a loss game. The promised compensation from the state governments in exchange of the waiver doesn’t come on time and becomes a liability on the books of banks.
Unfortunately, in most cases, state-run banks are misused for the roll out of such populist measures. Among the worst affected will be Andhra Bank and State Bank of India, which have significant exposure to these segments.
Rajan isn’t the only one who has warned against the waiver. In a recent note, India Ratings, formerly known as Fitch India, too had warned about the perils of the loan waiver and said such populist measures could set bad precedent in other states as well. "These schemes seem to have yielded electoral gains, similar announcements could be made in other states as well. The most vulnerable would be states in which elections are nearing," India Ratings warned.
The current proposal (by Andhra Pradesh and Telangana), which is a mix of full waivers and part credit in borrowers' account, depending on the loan outstanding, may mask the delinquencies for the time being if carried out, it said.
"Nevertheless, it carries the risk of significantly impairing asset quality going forward. The unintended outcome of this could be reduced availability of credit to the farmers from banks, forcing them to resort to the unorganised lending sector," India Ratings said.
Ultimately, the biggest victims in the whole process will be the farmer. Bankers too have made this aspect clear. “Borrowers need to be able to repay the loan so that they can source the loan again to undertake the activity. If loans become NPAs, they will not be able to undertake that activity," SBI chairman Arundhati Bhattacharya said this early this month.
Loan waiver is a dangerous way of pleasing the vote-bank first used by P Chidambaram in 2008 by rolling out a massive Rs70,000 crore loan waiver and set a precedent for other politicians too to woo the
"Almost all the banks have witnessed significant increase in agricultural delinquencies post the waiver. While the delinquencies seemed to be stabilising over the last two years, if these schemes are carried through, it could undo the work done by banks in educating borrowers on the importance of credit discipline," India Ratings warned.
Also one should note that the debt waivers often doesn’t reach the poor farmer but often benefits the rich and the middlemen, as pointed by Government’s auditor in the aftermath of the 2008 farm loan debt
waiver announced by the UPA-government when P Chidambaram was the finance minister.
Both Naidu and Rao may have clear political gains through the implementation of the loan waiver but they are, in fact, harming poor farmers by pushing them to the defaulter category. Going by the past experiences, the politicians are unlikely to heed to the caution on financial prudence from the central bank.
But, someone should make the poor farmers understand the debt trap laid by politicians to which they are about to walk in.
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