PC bowls a googly on farm loans

Experts are wondering where the Rs60,000 crore figure for farm debt came from

MUMBAI: The Union budget’s bumper Rs60,000-crore loan waiver to farmers was the main takeaway. However over the weekend analysts have been scratching their heads calculating the details of the finance minister’s waiver.

The budget says that the waiver includes all loans disbursed by “scheduled commercial banks, regional rural banks and cooperative credit institutions up to March 31, 2007, and overdue as on December 31, 2007, are covered under the scheme.”

Finance minister P Chidambaram has been typically evasive on how he is going to repay the banks for his government’s generosity, though how he came to the Rs60,000 crore figure is still unclear.

The Reserve Bank’s 2006-07 report (April-March) Trend and Progress of Banking in India shows that scheduled commercial banks had only Rs7,367 crore of non-performing loans related to agriculture as on March 31, 2007.

Then regional rural banks and cooperative credit institutions account for the remaining losses? “We think the agricultural non-perfor-ming loans of regional rural banks is around Rs3,000 crore,” said Ambareesh Baliga, vice-president of Karvy Stock Broking.  

Adding this to the non-performing loans of scheduled commercial banks, we get a figure of Rs10,367 crore. That still leaves around Rs49,500 crore unexplained.

“The Rs60,000 crore will include personal loans, and not just agricultural loans, extended to these farmers,” said Kshitiz Prasad, senior analyst at Anand Rathi Securities.

Personal loans adding up to the remaining Rs49,500 crore is clearly not possible.

As must have become clear by now economists are still not clear about the calculations, particularly the cut off date from which loans taken are valid for a waiver.

“It’s a cumulative number but there are some things which are unclear like the starting period,” said TK Bhaumik, chief economist, Reliance Industries.

Bhaumik said the loans could be outstanding from as far back as 2004, when the current UPA government came to power. “Some banks are in fact now hinting that the amount may be greater, even Rs65,000 crore. What is also not clear is the percentage of the outstanding loans from the figure from the loans which have gone bad,” he said.

Bad loans or non-performing loans/assets in banking terms are loans on which banks do not have any hope of recovery. They are written off if unpaid within six months from the due date.

However some analysts say the finance ministry must have done its calculations and the finance minister was well within his rights if he didn’t want to divulge the details of the waiver.

Also, it’s not clear how Chidambaram will repay the banks. It certainly is a touchy topic for Chidambaram, too, who even walked out of a live interview with CNBC-TV18.

Vaibhav Agarwal, analyst with Angel Broking, says the FM has been “quite mysterious, and has made some weird comments like ‘providing equivalent liquidity’, and nobody knows what it means”.

“It’s difficult to say. I guess he is looking to not only waive the loans but the idea is also to improve the balance sheets of cooperative and regional rural banks. And that will not be possible unless he gives these banks hard cash,” said an India-based fixed income and forex strategist from a US bank.

Some economists think that instead of waiving the loans, distributing cash to farmers would be a better idea. “I think it would have been a better idea if they would just distribute cash to farmers rather than giving them an impression that the government is ready to pay for their unpaid loans,” said Dr Ashima Goyal, professor, Indira Gandhi Institute of Development Research.

What this will do is ensure that the farmers continue to understand the difference between a loan and a grant.