RBI’s stance on Andhra loan waiver commendable
Given over 40% of all bank NPAs reside in priority sector lending, RBI has done well to nip in the bud the Andhra Pradesh government’s promise to waive over R40,000 crore worth of farm loans in the state; in which case, if the Andhra government still wishes to go ahead with the loan waiver, it will have to fund this from its own coffers. According to an RBI working paper by Shashidhar Lokare, while priority sector lending accounted for 31.1% of all gross advances at the end of FY12, it accounted for 41.7% of all NPAs; the corresponding figures for the non-priority sector were 68.9% and 58.3%, respectively. Put another way, in the case of SBI, 9.5% of its total agriculture portfolio is an NPA versus a much lower 4.4% of its lending to industry.
While the Andhra government was still collecting data to make its case to RBI, the central bank has said its independent verification of crop yields and bank savings patterns showed that farmers were not in as much stress as the state had made out while asking for relief. According to RBI, crop yields had to be less than half the normal yields for banks to consider loan relief. Given that the state will now contest RBI’s claims with its own set of data, it is obvious the chapter is far from closed, and a lot will depend on whether or not the central government weighs in favour of the state or remains a neutral observer. But what is important is RBI has not just learnt the lessons of the last R60,000 crore loan waiver just ahead of the 2009 general elections—farm repayments slowed the next year also as farmers realised banks could be arm-twisted—it is willing to do something about it as well.
It is not as if, in the past, RBI has not tried to block the political class from taking matters in its own hand; it is just that it has been quite unsuccessful. In Andhra Pradesh, RBI was helpless when the government said that loans to MFIs need not be repaid as they were at usurious rates, though RBI tried to fix things later through a committee tasked with regulating MFIs. In the case of bankrupt state electricity boards (SEBs), RBI has been a part of the financial restructuring programme (FRP), but it has not been able to ensure banks have taken any action against SEBs that have not hiked their tariffs despite this being part of the FRP conditions. Though the government’s financial inclusion plan—announced in the Budget, but to be spelt out in greater detail on August 15—appears to have more checks built in, RBI would do well to examine the impact of this as well, and insist on government guarantees if the banks it is in charge of are in danger of losing money. The banks may be owned by the central government, but the money they lend belongs to the public. Governor Rajan has done well to stick to his guns, and finance minister Jaitley in not pressuring him to do otherwise.