No equal treatment to good and bad borrowers: RBI

The loan reschedulement now remains the only possible face saver for both the govts as they have no immediate surpluses to fulfil this costly promise

In a simple and clear message, Reserve Bank of India (RBI) Governor Raghuram Rajan has told officials of the Telangana government they would have to differentiate a good borrower from a bad even in the case of farm loan reschedulement to protect the banking sector.

A team of senior officials headed by chief secretary Rajiv Sharma met Rajan on Friday to seek the regulator’s nod for the recast of short-term agriculture loans taken by the farmers.

“Raghuram Rajan said there has to be differential treatment between good and bad borrowers to encourage and incentivise the practice of regular repayment of loans,” a senior government official told Business Standard. The regulator was also not in favour of allowing repayment period beyond five years in the event of a recast, according to the official.

Last month, Andhra Pradesh government officials too visited Mumbai seeking agriculture loan reschedulement for their state, a request the regulator is yet to approve. The government yesterday decided to send a senior official once again to Mumbai, this time to meet the Deputy Governor in charge of banking, to pursue its request with the RBI.

“The RBI will handle the issue of loan reschedulement. But as far as debt waiver is concerned we are considering various alternatives,” AP finance minister Yanamala Ramakrishnudu said on Saturday somewhat repeating his earlier statements on the issue.

The Opposition YSR Congress Party, which had chosen to oppose the promise of debt waiver in the recent elections, however, accused the government of resorting to delaying tactics in the name of committees and recommendations.

Lobbying for recast
The two governments began lobbying for recast of farmers’ loans after the banking regulator and the Union finance ministry refused to extend any support for the scheme promised by the Telugu Desam Party (TDP) and the Telangana Rashtra Samithi (TRS) in the general elections.

AP chief minister N Chandrababu Naidu went a step ahead and promised the electorate he would sign the first file on farm loan waiver after becoming chief minister. Accordingly, on June 8, the day he was sworn in as chief minister,  Naidu signed a file constituting an expert committee to suggest ways to implement the loan waiver scheme besides promising to issue guidelines to spell out the eligibility criteria for borrowers within 15 days. So far, the government has not announced any such eligibility criteria.

Earlier, the RBI and banks had reportedly told the state government authorities that they should credit the money directly into the borrower accounts if they wanted to waive farm loans and not expect their involvement in any way.

The loan reschedulement now remains the only possible face saver for both the governments as they have no immediate surpluses to fulfil this costly promise. The leaders fear an adverse public reaction if they are go back on this promise.

Also, without reschedulement of the existing dues no bank will give fresh loans to these farmers during the current kharif season, which is yet to take off in the absence of rains so far. On the other hand, the agriculture loan portfolio of banks in Telangana and Andhra Pradesh will see a dramatic rise in NPAs as farmers have stopped repaying in the hope of a blanket debt waiver.

Downside
Earlier this year the authorities in the undivided AP had sent proposals for the recast of farm loans falling under areas declared as flood-hit or drought-hit during the last agriculture season. Since these proposals were not sent within three months from the time of declaration of calamity affected areas, the RBI did not respond. The new governments revived this old proposal three months later.

The governments are also aware of the downside of the scheme as it comes at a cost. The banks will charge the prevailing interest rates across the staggered repayment period and that will increase the total debt burden.

For instance, the officials of Telangana estimated the government would have to shell out around Rs 23,000 crore in a five-year repayment period on loans totalling Rs 17,320 crore, which are expected to be rescheduled.

If they have to adopt a differential treatment in favour of a good borrower, the government has to device ways to treat the loans of bad borrowers in a manner that satisfies the RBI. Bad borrowers account for almost half of these estimated loans, according to officials.

Meanwhile, the interest burden will be much higher in the case of AP as  the loan disbursals in that state are higher compared with Telangana.