Dear RBI,
I’m just a common man with a not so common, common sense. I felt upset, when Reserve Bank of India (RBI) advised the Government of India not to waive farm loans. I’m also upset about my inability to understand why you would say so. I spent time trying to understand your perspective. Yet, I think here is why RBI should support farm loan waiver.
Why RBI thinks farm loan waiver as a ‘Moral Hazard’?
During a monetary policy announcement, RBI chief says “We need to create consensus so that such loan waiver promises are eschewed. Otherwise, sub-sovereign fiscal challenges in this context could eventually affect the national balance sheet. It also entails, at the end of the day, transfer from tax payers to borrowers. If on account of this, the overall government borrowing goes up, yields on government bonds are also impacted. It can also lead to crowding out of private borrowers as higher government borrowing can lead to an increase in cost of borrowing for others.”
When simplified I understand they says, farm loan waiver will encourage more non repayment of loans and thus the credit discipline of the country and people will go down because the people who get the waiver keep expecting of future waivers and the loans remain unpaid. So, due to the inflation the interest rate of loans will increase for all. Thus, claiming farm loan waiver as a moral hazard.
Yes! It’s a valid concern.
Are these ‘Moral Hazard’s too?
Large number of willful defaulters used bribery and forgery by inflating accounts and false statements to avail huge loans from the bank. Most of these willful defaulters own multinational companies, which are large capital companies which still get loan restructuring while farmers and people in the MSME sector don’t.
Most of these companies are either public limited or private limited. Which means the company is a separate entity from its promoters. If the company bankrupts the assets of the promoters cannot be touched. Also a willful defaulter is not permitted to float any new business for just a period of five years from the date of being declared a willful defaulter. Can the same be said for the farm loans and farmers.
The bankruptcy law allows promoters of a businesses to safeguard them and their properties, why shouldn’t the farmers be treated the same way as well.
Is RBI considering this a moral hazard too?
The loans given by banks are called assets, which generate income via interests and instalments. If the instalment is not paid until the due date, it is called a bad loan. If it extends beyond 90 days, it is termed NPA. Banks write off their NPA’s of which most of them consists of large capital businesses by using the profits they make to balance the book.
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On the same grounds of morality shown on farm loan waiver, Shouldn’t the RBI allow the free market to prevail in banking sector by closing the loss making banks. But banks ask for additional investment from the government for capital expansion and other reasons which is a form of bailout from the tax payers money.
The reason Banks need a bailout is because of twin balance sheet problem. Where the over borrowed business doesn’t have better business and the over lend banks don’t have better repayments. It feels like a deadlock, but in reality it isn’t for the banks at least. The RBI should morally hold the banks and its officials accountable for over lending without proper assets and securities to recover.
Does the ratio of NPA and Priority Sector Lending match?
Priority Sector Lending includes the following categories,
(i) Agriculture
(ii) Micro, Small and Medium Enterprises
(iii) Export Credit
(iv) Education
(v) Housing
(vi) Social Infrastructure
(vii) Renewable Energy
(viii) Others
Now, the NPA’s on average are around 12%. If the RBI and banks did their job right, then the NPA accounts should also follow the same ratio of loans issued. Instead, the NPA’s are from Steel, Airlines, Minerals, Mining, Real Estate, Jewelry and other capex intensive large capital companies.
Banks do take farm loan insurance and charge a premium for this service when a farm loan is availed to the farmer. Why can’t the banks use the insured money to write off the loans than not supporting the farm loan waiver.
Why RBI Should Support Farm Loan Waiver?
When the farmer does not pay the loans, the bank acquires what is pledged. Now the farmer is jobless in the best case scenario. The worst case scenario, he risks his live hood of his land, dignity in hopes he can grow a crop and sell it for small profit, despite the poor seeds, infertile land, unpredictable climate and no water supply.
- When the farmers don’t go to work, no food will be produced, there is a risk of inflation when the government imports food from other countries and the prices shoot up and so does the fiscal deficit. Now it becomes RBI’s problem that farmers don’t go to work. When agriculture sector contributes directly or indirectly in earning forex, control inflation apart from proving food and happiness, why shouldn’t their farm loans be waived.
- The automobile sector, consumer companies, NBFC’s all depend on the thriving rural economy. The rural economy consists of mostly agriculture and allied income. If they don’t make money, there will a drop in GDP and the obligations to meet the fiscal deficit target and to an eventual fall in the credit rating (which one way or the other doesn’t go up at all). You people at RBI should know this better than I do.
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- Now to fuel this counties economy, we need to spend. To spend the disposable income has to go up. It won’t when the food prices shoot up. The basic necessity of human life is the sustainable production of food. The already hard challenges make it hard enough for the farmers to produce food. Please consider them to be agents of growth to the economy rather than painting all farmers as loan defaulters.
- Consider the farm loan waiver only for the needy farmers to be helicopter money. Even though we are facing high inflation by waiving off the small farmer debts we will have lower food inflation. The spiral effect of low food inflation can bring many benefits and we all have a chance to boost the economy and also have food when we our hungry.
What is Morally right?
RBI should avail low interest credit to farmers to escape loan sharks and should act on giving insurance protection for their crops. Governments should fix the right price for a farmers produce and the right amount of water to make that produce. A countries growth should not be measured by only GDP but by its people’s health and happiness also. We should learn from the Wisdom of Bhutan; the happiness will be there only when there is enough food for all. Only with happiness of an individual will the country grow into a better economy.
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Image Credit: REUTERS / Danish Siddiqui
Do you have any other reasons why RBI should support farm loan waiver ? Share them on Trdinoo for others to learn and please share us with friends and people you know.
