Thursday, April 10, 2008

Article entitled `Farm Loan Waiver – Rehabilitation of farmers or banks?'

From Lok Raj Sangathan web-page, reproduced here for your convenience. The original link is here. Of course you will immediately realize that Appa is the author.

Farm Loan Waiver – Rehabilitation of farmers or banks?

By C. A. Balasubramanian,
Additional Controller General of Accounts, Government of India (retired)

The Bank Loan Waiver Plan, announced by the Finance Minister in his budget speech, is supposed to have taken the Parliament and the people by storm. The euphoria generated by the government and its propaganda machinery, ably assisted by the subservient electronic and print media, wanted the people to believe that the government had, at one 'fell' stroke, found the key to a final solution for all the ills afflicting the agricultural economy.

The proposal announced a " complete waiver of all loans overdue on December 31, 2007, which have remained unpaid ( a tautology!) by small and marginal farmers." The fact that there is not even a token provision in the budget, which can subsequently be enhanced – by Reappropriation of Funds in the Budget Grants, or by obtaining Supplementary Grants -- justifies one in suspecting that this is more of a knee--jerk reaction to the forthcoming Elections than a well--thought out and implementable proposal, which is really going to help the intended beneficiaries.

As a learned analyst pointed out in The Hindu, the bank loan waiver plan, as elaborated by the F.M. later, seems to be more complex than just a write off of agricultural loans which are outstanding on a particular date. Initially, there were doubts as to who would bear the burden -- the bank or the government The F.M. has promised ' liquidity' for the banks. Whether this amounts to compensating them remains to be seen; but, this is central to a number of related issues -- autonomy of government- owned banks, and power of government to dictate a commercial banking decision. Dr. Vaidyanathan, the development economist, has pointed out that the government does not spell out the basis of the estimate (of Rs. 60,000 crores), or of the Institutions, Loan Categories, and class of borrowers who will be covered by the scheme. Co-operatives have by far the greatest reach in terms of accessibility, number of borrowers, and delivery of credit to the rural population. Concerned by their near-collapse -- due, in a large measure, to the conscious State policy of interference in the grant and recovery of loans -- the Central government set up a task force to suggest ways to arrest the trend and revive the co-operatives. The task force suggested radical changes in the legal and institutional framework essential to 'enable and induce' co-operatives to function as autonomous and self-regulating entities; it emphasised the need to eliminate government interference in grant of loans, recovery processes,
and waiver of dues from borrowers. The Central government accepted the recommendations and, in consultation with the States, evolved a consensus to implement the reform package. The Central government committed to provide around Rs.18,000 crores to clear accumulated arrears, over a period of time, and linked to fulfilment of specified conditions. This programme covers a significant part of what is being attempted in the current waiver scheme. The learned analyst says that it is ironical that the decision to go for a general waiver comes in the wake of this reform programme which is under way.

Various other lacunae, ambiguities and drawbacks in the bald announcement of the scheme have been forcefully brought out by other experts. So, I shall just draw attention to a few aspects:

The scheme proposes a complete waiver of all loans overdue on Dec. 31, 2007, remaining unpaid by small and marginal farmers.
(1) No cut-off date has been specified for such loans. Will the scheme cover loans taken several years back and remaining unpaid?
( 2) The intention of the scheme (presumably) is to enable such farmers to become eligible for fresh loan(s) for carrying on with their agricultural activities. What happens if such loanees have
disposed of their holdings or moved to some other work, or migrated elsewhere in search of work? If loans taken by this category of farmers are waived in terms of the scheme, the government will be merely reimbursing to the banks the loans granted by them, which have become irrecoverable, without any corresponding benefit to the farmers affected.
( 3 ) Will the banks have records giving the particulars of the loans (granted to the farmers ), which fulfil the conditions laid down in the scheme, with the names and addresses of the loanees,
extent of their land holdings, amount of the loan repaid and balance remaining? Will statements of all such loans which are eligible for waiver be authenticated and subject to audit?
( 4 ) According to the Banking practices, and rules and regulations, many of the irrecoverable loans will have been written off (and accounted for as such), over a period of time. Farmers who
had taken such loans might no longer be available, for availing themselves of the benefit of such waiver. So, waiver of such loans will only benefit the banks; it will be an exercise in the rehabilitation
of the banks (and other institutions involved), and not the farmers.

In the absence of clarity on the various issues involved, the Scheme will only degenerate into one of rehabilitation of banks and other institutions which have granted the loans. And, it will go the way of the "Rural Development Schemes" funded by the Central government over the years, where it is universally acknowledged that 75 paise in the rupee went into the pockets of various agencies and intermediaries involved in the 'implementation' of the Schemes, and not even 25 paise in the rupee reached the beneficiary. It only added to the ' liquidity ' (by which the government swears!) in the economy.

No comments: