Loan waiver half Budget estimate

IN-DEBTED TO THE POLLS

Farmer repayment record also immaculate.

The amount of loans to small and marginal farmers that commercial banks, cooperatives and regional rural banks have been asked to waive is likely to be slightly over Rs 23,000 crore, less than half that estimated by Finance Minister P Chidambaram in his Budget speech.

The share of this due to commercial banks is probably around Rs 6,000 crore "� the total overdue from all farmers to commercial banks is around Rs 10,000 crore.

According to data culled from the Reserve Bank of India's Trend and Progress of Banking in India, apart from the Rs 10,000-crore overdues from all farmers in favour of commercial banks, another Rs 3,000 crore was overdue to regional rural banks and around Rs 25,000 crore to various co-operative sector banks.

Of this, around 60 per cent, or Rs 23,000 crore, was on account of small and marginal farmers (defined as those with under two hectares of land) "� this assumes the share of large and small farmers in overdues is the same as that for the total debt as revealed by the NSS rural indebtedness survey for calendar year 2003. 
 

GOOD CROP OF LOANS
Bad loans are less than estimated
Figures in Rs crore	Small  farmers*	Large  farmers	All
Total overdues**	22,507	15,507	38,000
Budget estimates for 2007	50,000
* With less than 2 hectares of land ** Based on proportion from NSS indebtedness survey, 2003-04 Note: Data pertains to loans overdue from banks, cooperatives and regional rural banks

Also, while most commentators have assumed the loan waiver will hit further farm credit from the banking sector, this is unlikely to be true for at least two reasons.

First, government-owned banks have to meet priority sector targets and so have to lend to farmers "� which is why, after the Dandavate-Devi Lal loan waiver of 1990, farm credit continued to do extremely well.

Second, farmers have a very good track record of repaying bank loans. RBI data show that while farm credit has soared, overdues have grown marginally. 
 

And farmers repay most loans Figures in Rs crore, for scheduled commercial banks only
	Amount demanded	Amount  repaid	Amount  outstanding	Payment record
				Repaid/ Demand	Repaid/ New  Loans
2003	28,940	21,811	7,929	75.4	NA
2004	33,544	25,002	8,542	74.5	97.6
2005	45,454	35,733	9,721	78.6	96.8
2006	46,567	37,298	9,269	80.1	101.2
Note: When Loans Repaid/New Loans exceeds 100, it means old overdues are being repaid as well Source: RBI Report on Trend and Progress of Banking in India, various issues

The last year for which data are available, 2006, shows that apart from paying off current loans, farmers were paying off a portion of old overdues as well. With this track record of payments, there is little reason to think that banks would hesitate to extend fresh credit to farmers.

In terms of equity, the finance minister hasn't given the farm sector anything more than he has given to lower middle class urban Indians.

On average, with around Rs 23,000 crore of overdues from small/marginal farmers, this means that the average small farmer has received a gift of around Rs 3,100 a figure that's marginally less than the tax relief given to those earning Rs 1.5 lakh a year "� with the income tax kicking in at Rs 40,000 extra, that's a Rs 4,000 tax relief for those earning Rs. 1.5 lakh. The average person in the Rs 1.1 lakh to Rs 1.5 lakh category will receive a Rs 2,000 tax benefit.

Though the finance minister has not spelt out details of how this waiver is to be made good to the banks, including those in the cooperative sector, it is unlikely to make much of a dent in the fiscal deficit.

Even if the entire Rs 23,000 crore is to be paid to the banking system in a year, rather than in three years as has been indicated by the finance minister in various post-Budget interviews, that is less than one half of one per cent of the projected 2008-09 GDP of Rs 5,303,770 crore. If the money is to be made good in three years, the impact falls even more dramatically.