'Good vs bad' illogic of loan waivers

'Good vs bad' illogic of loan waivers

Waiving outstanding loans of big companies, as opposed to small crop loans, is economic nirvana.

One fails to understand. How come farm loan waiver in Uttar Pradesh, Maharashtra, Rajasthan and Punjab is considered to be bad economics whereas massive loan waiver for big corporate borrowers is construed to be good economics, leading to economic growth.

“Repeated loan waivers by various state governments distort credit pricing, thereby also disrupting the credit market,” former RBI governor Raghuram Rajan had once remarked. Endorsing the viewpoint, State Bank of India chairperson Arundhati Bhattacharya said last month that crop loan waivers disrupt “credit discipline” as “the farmers will wait for the next elections expecting another waiver.”

There is no denying that writing-off of farm loans certainly makes some farmers habitual defaulters, expecting another waiver at the time of the next elections. But let’s also look at what the Chief Economic Advisor has to say.

Speaking at Kochi the same day, CEA Arvind Subramaniam suggested that the government needs to bail out large corporate borrowers. “You need to be able to forgive those debts because this is how capitalism works. People make mistakes, those have to be forgiven to some extent,” he said, and added, “Political system has to be able to do that and bad bank is one way of trying to do that.”

If this is how capitalism works, one wonders why it doesn’t work the same way for farmers. If rich corporates can make mistakes and get a massive bail out, why are farmers, who actually don’t make mistakes but are victims of economic policies that keep them deliberately impoverished, begrudged a loan waiver? Are farmers not part of the same capitalist system? Unless, of course, they are considered to be the children of a lesser god.

The policy of treating corporate defaulters with velvet gloves does not end here. Arvind Subramaniam goes on to say that “bailing out big corporate will surely lead to allegations of corruption and crony capitalism. There is, however, no other way to solve the problem but to write-off the mountain of debt.”

If this is what growth economics is all about, then Arundhati Bhattacharya needs to understand that crop loan waiver will surely bring “credit indiscipline” among farmers but there is no other way to solve the problem.

Credit indiscipline among farmers, as she fears, is nothing different from the credit indiscipline that corporate borrowers resort to. Why, then, single out farmers for ensuring credit discipline while allowing corporate defaulters, most of whom are willful defaulters, to virtually go on robbing the banks?

According to the latest report of the Public Accounts Committee of Parliament, headed by K V Thomas, out of a total Rs 6.8 lakh crores of non-performing assets (NPAs), a whopping 70% are those of big corporate houses, whereas hardly 1% belongs to farmers. Interestingly, much of these bad debts are predominantly of the large corporate players in steel, power, infrastructure and textile sectors.

And how much of it is likely to be written-off? Well, hold your breath. India Ratings, the credit rating agency, estimates that close to Rs 4 lakh crore, out of a total of Rs 7.4 lakh crore stressed loans that the big companies have accumulated over the five year period, 2011-2016, is expected to be written-off.

Poor-rich capitalism
Let’s also not forget, this is not the first time that the banks are going to waive loans of big companies. Over the past decade, close to Rs 10 lakh crore has been written-off or ‘restructured’. The question that needs to be asked is why does the corporate waiver keep coming back year after year?

Since writing-off of corporate debts raises loud protests and charges of crony capitalism, the best way being suggested is to create a special bank where all these bad debts will be parked. This clearly shows that capitalism only works for the rich and the powerful. The banking laws that work for the rich defaulters do not work for the poor farmers. Waiving the outstanding loans of big companies, as opposed to small crop loans, is economic nirvana.

Despite the election promise of waiving farm loans in UP, news reports state that the write-off will be restricted to overdue cooperative bank/primary cooperative societies’ loans, which according to the state government are not more than Rs 8,500 crore.

This is roughly 10% of the unpaid dues of Rs 86,000 crore to commercial and cooperative banks. In Punjab, too, where the Congress party had promised to write-off farm loans, the overdue loans stand at Rs 5,150 crores.

Although Arundhati Bhattacharya clarified that the bank has not received any request so far to waive-off farm loans in UP or for that matter in Punjab, one fails to understand why the entire outstanding agricultural loans pending before commercial banks cannot be shifted to the proposed bad bank. Why shouldn’t the same banking rules meant for rich corporates apply to poor farmers? Or is this how capitalism works?