Farm loan waivers are not the same as corporate NPAs – and it’s tough to say which is worse

Karnataka became the latest state to announce a loan waiver for farmers, saying this week that it would waive off Rs 8,165 crore worth of agricultural loans taken from co-operative banks. The move came following similar and much bigger waivers from other states including Punjab, Maharashtra and Uttar Pradesh, while demands for similar schemes are starting to echo around the country.

Not everyone is happy about the waivers: On Thursday, Union Minister Venkaiah Naidu called them a “fashion” and said they should only be used for emergencies. But the counter debate has also been strong, with one of the central arguments saying governments are hesitant to help out needy farmers, even as large companies with huge non-performing assets are being offered bailouts.

“Agriculture is indeed a state subject,” wrote analyst Devinder Sharma, “but when it comes to industry, which is also a state subject, the finance ministry has no qualms about writing-off of the massive bad debt.” Many argue that the government has given banks a free hand in lending to big corporate clients and then waived off loans after they went bad, while farmers have to resort to extreme measures such as drinking their own urine to get the government’s attention.

But are these genuine comparisons? Is the state really being partial to big business, even as it reluctantly hands out money to farmers after they started to agitate? Or are farm loans a sign of dubious credit culture, adding huge fiscal burdens on the state while encouraging people to agitate more?

Scale of the problem

That both farmers and corporate India are in financial trouble is inarguable.

The effects of demonetisation, a bumper crop and various inefficiencies within the agricultural system have led to a price collapse and pushed farmers across the country to the edge, despite good rains during last year’s monsoon. This has turned into unrest, with protests across the country, and some farmers even dying at the hands of the police in Madhya Pradesh.

Industry has an equally substantial headache. Despite efforts by the Reserve Bank of India to address the issue, banks continue to be riddled with massive amounts of non-performing assets.Till last count, there were NPAs of Rs 9 lakh crore with another Rs 2.3 lakh crore at the risk of slipping into bad debts. Some of the hardest hit are crucial sectors, including telecom, iron and steel and manufacturing industries. And the banks that gave out the loans have constantly called for bail-outs from the state. Most recently, the State Bank of India wrote to the government and asked for “immediate intervention” – meaning relaxing the terms of their loans – in the rising debt among telecom companies which has reached more than Rs 4 lakh crore, according to reports.

Aside from the scale, however, it becomes tough to genuinely equate stressed corporate assets to farm loan waivers, even though they share many aspects.

Direct vs indirect

Farm loan waivers are direct costs for the state. Corporate loans take a more circuitous route.

The impact of farm loan waivers and bad loans is vastly different on the national accounts.

“Farm loan waiver is directly coming from the fiscal budget. The burden will be borne by the respective treasury of the state government. For instance, [Maharashtra]’s fiscal impact will be double the current fiscal deficit of the state. In banks, the burden might fall on shareholder. Banks might write it off but they continue the recovery process,” economist Ajit Ranade said.

The remedial measures taken are quite different in farm loans from corporate debt. While banks have a host of legal remedies such as debt recovery tribunals and corporate debt restructuring when companies default, a farm loan waiver simply comes as a subsidy from the government.

As a result, in case of stressed corporate assets, the defaulting entity might end up losing the whole company if they don’t pay up on time even though the RBI has not been able to make much of a progress to solve the NPA problem through its slew of measures. Eventually, the burden of corporate NPAs is going to fall on the shoulders of the government which is at the helm of PSU banks who are constantly vying for more funds.

Overall costs?

It is unclear which will end up costing the government more.

A recently published paper by Credit Suisse estimated that farm loan waivers across eight states including Madhya Pradesh, Rajasthan, and Punjab would cost under Rs 2 lakh crore, with that amount spread over a few years.

“However, in our view, this would be the upper end of the fiscal cost, and the final number could be lower, and the fiscal cost may be spread over 2-4 years. [Tamil Nadu], for example, has already gone through a waiver of co-operative bank loans worth Rs 60 billion over five years; only the courts’ directive of extending it to other farmers remains,” the paper stated.

This is so because most of the waivers announced come with conditions attached and not all agricultural loans are waived off. Mostly, the interest is waived off or the loan waiver is provided to only a certain set of borrowers who are selected based on certain criteria. In the case of Maharashtra, it was decided that only marginal and small farmers who paid their loans regularly will get a waiver.

At the same time, corporate debt waivers are not as sweeping. While the banks keep demanding additional capital from the government, the current government provided only a promise of infusing a total of Rs 70,000 crore in public sector banks over a period of four years in August 2015 through the project Indradhanush. Meanwhile, these banks are also supposed to raise another Rs 1.1 lakh crore from the open market to meet their capital requirements as NPAs go through the roof.

“The Public Accounts Committee of Parliament has estimated that the total bad debt of public sector banks, known as Non-Performing Assets, stands at Rs 6.7 lakh crore. Out of this 70% belongs to the corporate whereas only 1% default is of farmers,” said Radhika Pandey, consultant at the National Institute for Public Finance and Policy.

Moral hazard

Both represent a moral hazard. Apart from the fiscal burden, any kind of loan waiver come with the burden of moral hazard that waiving off loans destroys credit culture – something that even central bank governors have warned about. Handing out waivers, this argument suggests, starts a vicious cycle of people not paying their loans in the hope of getting a waiver in the future. This further makes those who pay on time feel cheated for being responsible with their money.

The question about moral hazards come up most frequently with farm loan waivers. “I think it undermines an honest credit culture. It impacts credit discipline. It plugs incentives for future borrowers to repay. In other words, waivers engender moral hazard,” RBI Governor Urjit Patel said two days after Uttar Pradesh announced a Rs 36,000 crore loan waiver scheme.

But what about the credit culture among the corporates? An analysis by Mint of RBI data showed that only 6% of agricultural loans were deemed to be defaults while companies didn’t pay 14% of their loans.

This implies that companies fare worse than farmers in paying back their dues and the talk of credit discipline being a consideration for loan waivers might just be one sided.

“Even in the worst drought years (2015), only 7.4% of agriculture loans were stressed. But nearly a fifth of the corporate loan book was under stress despite profit margins of companies showing some improvement in 2015-16,” Aparna Iyer wrote in her column for Mint.

Different liabilities, same effect

The liabilities are not the same, but the overall effect might be the same.

Relatively speaking, farmers are dealing with a much more dire situation than corporates. Their livelihood is on the line, and even a loan waiver only comes as a temporary balm.

“In case of corporate loans, the loan is given to companies not the owners so their personal assets are rarely attached as collateral. Whereas in case of a farmer, he is supposed to pay the loan back from all resources available. Corporate loan restructuring is happening from the bank’s balance sheet,” said economist Ajit Ranade.

Ranade added that it will be unfair to assume that farmers are let off easier than companies when it comes to loan waivers. Firstly, the waivers only apply to those who took loans from banks and not moneylenders. Secondly, waivers do not provide any future assistance in generating crops or livelihood and thirdly, most of the farmers do not own land so they can’t avail a bank loan.

However, with farm loans as well as NPAs of companies, it is the banks who take the first hit and then it trickles down to the citizens. So one might debate their contents and quantity, but the fact remains that both should be anathema to a well functioning political economy.

“But a point to be noted is that the share of agriculture in bank credit has hardly grown in a decade. Bankers may have turned unfriendly towards companies of late, but they were never friends of the farmer,” Iyer wrote in her column.