Hidden cost of loan waiver
Such an unprecedented waiver sends a signal that in the agricultural sector, loans need not be repaid. And it will only treat the symptoms of the rot affecting the sector, not its root cause
The dramatic waiver of bank loans of Rs 60, 000 crore for agriculturists in this years budget has been described as the mother of all waivers. The immediate objective of the government behind the waiver has been perceived by many as a bribe to catch the four crore vote bank of agriculturists. In a democracy, it is the prerogative of the ruling party to extend concessions on the eve of elections. There can therefore be no objection on this ground to the waiver.
One valid objection could be that it weakens the Indian financial system. The Finance Minister in his press conference came up with an ingenious defence against this criticism. He said that if the Rs 60,000 crore was not written off, it will remain as nonperforming assets of the b a n k i n g sector for q u i t e some time and thereby weaken the system. The government proposes to make up these Rs 60,000 crore to the b a n k i n g sector i n the next three years. In fact, the entire banking sector will be financially strengthened to take on the challenges of the future.
Finally, he came up with the ultimate political question: Are you for farmers or against? It is the time to be stand up and be counted. He firmly declared that he was in favour of farmers.
While these are the immediate patent aspects of the loan waiver, there are two latent aspects which require consideration by those who are seriously concerned about the sustainable and vigorous development of our country.
Business is a win-win exercise. The soul of business is trust between participants. When any party extends a loan to another party, it is expected that this loan will be returned along with interest. When this basic principle is compromised, it strikes at the very foundation of sustainable economic development. At the same time, let us not forget that all over the world whenever there is a massive failure to return loans or massive frauds take place, governments have invariably stepped in to save the system by pumping in money. In the context of the current subprime crisis in the USA, the American Federal Reserve Bank and the US government are doing their best to ensure that the financial system is sustained.
The nationalisation of Northern Rock, one of the leading mortgage banks in UK, is another example of government intervention. In view of this, nobody can quarrel with the government for coming up with this massive loan waiver, especially in the context of the large number of suicides by agriculturists due to indebtedness.
The danger and damage caused by the governments action is that by such an unprecedented massive waiver of loans, the government has sent a signal that in the agricultural sector, loans need not be repaid.
Because of votebank compulsions in our democracy, governments will always come out with waivers. This knocks out the basic element of trust between banks and agriculturists, which is the foundation for a viable sustainable financing system. The finance ministers defence of strengthening the system is therefore hollow.
There is also a second aspect. The real solution to the problem of suicides is to understand what is the root cause of the failure of agriculture and the incapacity of agriculturists to repay debts. Is it that agriculture itself has become unviable and is no longer a bankable sector?
If this is so, corrective measures should be taken so that agriculture becomes economically sustainable on its own.
In the absence of this, merely providing a massive loan waiver will amount to treating only the symptoms of the disease, without removing the root cause of the disease. This is the second negative aspect of the governments action which needs to be corrected.
Politicians think about the next election and statesmen look beyond the next generation. Unfortunately, in our country we have only politicians left.