LOAN WAIVERS – POLITICAL BROWNIE POINTS BUT ECONOMCIALLY, RED!

By Ruma Dubey

Loan waiver. That is probably the biggest curse of our country today. For scoring political points, loan waivers have become a bait, putting the country’s fragile banking system into further jeopardy.

Farmers need to be given everything and anything – they are there which is why we are able to eat. But loan waiver is morally wrong. They never asked for it; it is the Congress which set the precedent of waiving loans; before that farmers did not know that even such a thing could be done! Congress won these elections but it cost the banking system some Rs.60,000 crore. Today, this has become the norm. Andhra and Telangana also announced a waiver now there is talk of Karnataka promising the same. Banks might as well put up a tent and just give away money for free!

One of the big reasons for the election win in UP is also the promise made by Yogi Adityanath that he would waive off farmer loans. He won and now he has announced waiver to the tune of Rs.36,000 crore. It is a great political victory for him but economically this is just not right.

Before we get into the economics of this, just look at it from the farmer point of view. If you had taken a loan of Rs.80,000 and every month were saving up, cutting corners but making the payment diligently. On the other hand, there is your neighbor who never pays back loans; you look down upon him because of his irresponsible behavior and he looks down upon you because he thinks you are foolish and being an overzealous citizen. In this, the loan waiver gets announced. Who is the fool now? The neighbor will have this smug expression on his face while you will be looking sheepish. You did the right thing but the Govt is telling you otherwise – it’s OK if you cannot pay, we will waive it off; its free lunch for all! So next time you take a loan and elections are round the corner, surely you too will wait and watch. That’s the mentality which will now take over – why pay when there is chance of a waiver? So such largesse’s make even an honest and responsible man into a willful defaulter. Those who honestly paid have been punished and it is at their cost that others make merry – isn’t that the feeling which every debtor will now nurse?

Now the economics of this waiver:

• Total loan waived off – Rs.36,359 crore for 2.15 crore farmers in UP
• Rs.30,729 crore is loans of up to Rs.1 lakh; Rs.5630 crore is already bad.
• Post this, banks say even honest, repaying debtors might start defaulting
• Average loan size in UP is around Rs.1.25 lakh and total exposure of banks to such small loans is pegged at Rs.86,240 crore – so why not all is the question being asked which does not bode well for the Govt and the banking sector.
• No central Govt assistance for this waiver – UP Govt to float Kisan Rahat bonds to raise funds. History has shown there are no buyers for such bonds and the private investors shun it like a contagious disease. If these state bonds have to become liquid, naturally the central Govt will have to be the guarantor. So how can the Center say that it will not be affected at all; it will all ultimately come down to the center.

The fallout of this is that other states will soon start doing the same – already as we said, talks are doing the rounds in Karnataka, Tamil Nadu, Maharashtra and Punjab. Waivers are done only where there are natural calamities but not to score political points.  And that is worry today…this waiver will one day come to haunt this Govt; we are already spooked!