Farmer will continue to be at the mercy.

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Vibha Batra, Co-head (Financial sector Ratings), ICRA, agrees: “A large percentage of these overdues (of Rs.60,000 crore) could be on the books of cooperative banks and rural banks. Therefore, the impact on scheduled PSBs may only be a subset of this amount. Further, the incremental hit on the PSBs’ capital (assuming no reimbursement from the government) could be still lower to the extent of unprovided NPAs, as these overdues could comprise interest overdues on NPAs (which are not booked as income).”

At the same time, economists like Swaminathan Ankleswaria Aiyar feel that the waiver will reduce demand for farm loans in the next season, thereby allowing banks to lend more to other profitable entities. This will immediately improve their bottomlines in the coming year. In many ways, the state-owned banks will suddenly be in a much-better financial position, and will also be more prepared for Basel II norms as well as for the aggressive entry of foreign banks in 2009 due to changes in FDI norms.

However, there is a flip side to the issue. In fact, there’s another catch; it’s called Catch 60,000. And this shows that what Chidambaram has done is not going to make too much of a difference. It’s only a political hype; at the socio-economic level, the lives of the impoverished and suffering farmers will not change. In addition, the loan waiver scheme goes against the letter and spirit of the finance ministry’s report in July 2007 on agriculture indebtedness by a committee, headed by R. Radhakrishna.

For instance, the Committee found that most of the farmers were indebted to non-institutional (read: non-banking) sources. In 2003, over 42% of them had taken loans from such agencies; in fact, nearly 27% of the farmers were in debt to the local private moneylenders. In states like Andhra Pradesh, Rajasthan, Bihar, and Punjab (surprise, surprise!), the farmers were more dependent on the moneylenders for finances. In Andhra Pradesh and Rajasthan, the exposure was over 65%, and the figure was over 50% in Punjab. Even in states like Tamil Nadu, it was slightly higher than 45%.

When one looked at the marginal and small farmers, the dependence on non-institutional sources went up dramatically. In the case of farmers, who owned less than 0.01 hectares, their exposure to moneylenders and traders was over 75%. Those who owned 0.01-0.40 hectares got nearly 57% of their loans from such agencies. Overall, the figure for those farmers who owned upto two hectares of land – it’s these farmers who have got the much-touted loan waiver from Chidambaram – was nearly 50%.

“It is indeed a matter of concern that in spite of all the efforts made for the spread of institutional finance (read: scheduled banks), it accounted for only two-fifths of farmers’ outstanding debt. Since the interest rates charged by non-institutional sources are high, this might have imposed heavy burden on farmers,” noted the report. Therefore, the Budget largesse means nothing, or little, for these farmers. Unfortunately, it is especially true of states, where the dependence on farming is higher than others.

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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