Sunday, June 01, 2008

Loan waiver culture - The ET editorial

21st May 2008 dated The Economic Times editorial (Waiver hits credit culture) lamets that waiver of farm loans by the Government of India has resulted in increased defaults.
The government’s farm loan waiver scheme has already caused default rates to rise, forcing the country’s largest bank, the State Bank of India (SBI), to temporarily stop funding tractor and farm equipment purchases.
Of course, the finance minister P.Chidambaram immediately intervened and directed the state owned bank to continue giving tractor loans.

Muhammad Yunus of Grameen Bank has severely criticised bank loan waivers by the Government owned Bangladeshi banks and how this has seriously affected the operations of microfinance bank, Grameen.

Paying back the loan is a cultural concept. People borrowing money should feel the strong moral urge to pay the loans back. Loan waivers instead make them feel that if things go really, really bad, Government will step in and cancel the interest payable and even the principal. This will make even the decent guys default on their loans.

Such a culture will seriously impact the microfinance institutions operating in the rural areas. The farmer whose agricultural loan from the state owned bank was waived, will have a wife who is the ideal candidate for taking loans from a microfinance company. Think about her attitude to paying the loans back, when her husband's loan gets waived by the Government itself!

The same ET editorial says the following:
It is also important to ensure that micro-finance and not bank lending becomes the dominant way of disbursing credit to the farm sector. The entrenched patronage culture has meant that despite farm credit growing at a fast pace, the number of farmers covered has not increased proportionately, implying that the same set of beneficiaries are cornering the increased credit.
No right thinking MFI should enter the farm loan sector. It is the most dangerous sector in India and also Bangladesh. As long as Government intervention persists, privately funded MFIs should never lend any money to the farmers. Muhammad Yunus has made this very clear... he stays as far away from the farm sector as possible, and he is managing a large bank. The Indian MFIs are tiny compared to Grameen and they will be killed by the farmers and Indian Government together.

The Indian Government has made the lives of several cooperative agricultural banks and societies crippled. The government will announce the loan waiver and the banks will be reimbursed at a later date, sometimes spreading over 5 years the money lost from waiving the loans. During this time, the cooperative banks will struggle to operate. Larger nationalised banks will manage because of their other portfolios.

Providing relief to the farmers in distress is very important. I am not against that. However the methodology should be carefully thought out. Low interest or no interest loans from Government directly to the affected, who in turn pay the banks for the loans they have taken should be the way to go. Rather than waiving the loans, give them a further liberal loan which they can pay back slowly. Yunus has done this in case of Grameen.

The Government can offer to pay the premia on crop insurance out of their budgeteray allocation, thereby offering completely free of cost insurance to the farmers. That would be acceptable. As it is, farm income is not taxed. Water comes free wherever farmers live in the river bed. Fertiliser is subsidised by the Government. In several Indian states, power is free to the farmers, or offered at extremely cheap rates by heavy subsidy.

If despite all this the farmers fail, it is because of the vagaries in the weather, lack of proper education, outdated methods of farming, highly fragmented fields reducing the yield drastically, complete lack of crop insurance and lack of cold storage facilities which can help them to get good price.

Rather than waiving the loans, the government should focus on improving the agricultural infrastructure and educating the farmers.

A panchayat near Chennai - Kuthampakkam - had a president called Elango for the last two terms. Currently someone else runs the panchayat. Kuthambakkam used to be full of thieves and robbers. (The word 'Kutham' is Tamil means 'Crime'. Pakkam is Ville. The place itself was called Crimeville, so you can imagine what the inhabitants used to do there!) He gave a speech couple of years ego on what he achieved there. He helped the farmers get loans, on the condition that they pay back the loans to the banks so they can get more loans. He helped set up flour mills, so that local entrepreneurs will procure the produce and pay a decent money and make the same into value added products. He got the village women to press oil, mill rice, make flour, produce other processed food and helped them to sell in the nearby towns. The village started propspering.

When DMK won the state elections in Tamil Nadu, one of the first thing they did was to waive off agricultural loans taken from the state controlled co-operative banks. Elango said that the farmers in his village started giving him dirty looks for forcing them to pay the loans back, while their brothers elsewhere enjoyed complete waiver. (His presentation @ slideshare in English, His speech from in Tamil, My blog post then about this presentation in Tamil.)

How one man's laudable efforts end up for nought by the thoughtless 'waiver' actions of a government!

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