SLR bond relief likely for banks' farm loan waiver

Statutory Liquidity Ratio (SLR) bonds, a government instrument for meeting financial commitments, are likely to be issued to public sector banks for waiving off Rs 60,000-crore worth farm loans.

"We (public sector bankers) have received some strong indications that the government might opt for SLR bonds to compensate public sector banks. The decision may be announced in one week," UCO Bank Chairman and Managing Director S K Goel told said here.

While banks will no longer have any bad farm loan on their books, the exact mode of how they would get their money back is still unclear. There is also a possibility that might utilise a mix of options, including the SLR bond route to provide sufficient liquidity to the PSU banks.

A direct payment of cash is another option but bankers feel that the government would avoid this route as it would impose a tremendous burden on the exchequer. In the Budget, Chidambaram announced that farm loans to marginal and small farmers owning up to two hectares would be waived off amounting Rs 50,000-crore.

For other farmers, a one-time settlement in which 25 per cent of their loans would be waived off if they pay the balance 75 per cent, was announced. This waiver would cost a further Rs 10,000-crore.

Chidambaram had said in his Budget speech that the government would find a way of providing liquidity to the public sector banks, which bankers, interpreted to mean that they would not be allowed to suffer a loss.

While the loan-waiver might help banks to clean-up their books in the immediate term, they might face some problems arising out of this decision over the long-term, IDBI Bank's Chairman Yogesh Agarwal said. "The performing borrowers (those who pay regularly) may not repay fresh loans in future," Agarwal said.

Two financial sector experts, Uday Kotak, vice-chairman and managing director of Kotak Mahindra Bank and Ashok Wadhwa, CEO, Ambit, had also raised the moral aspect of the waiver, saying it amounted to penalising those who were regular in their loan payments.

With only a minuscule farmer population accessing formal credit lending sources such as banks and co-operatives and the majority still borrowing from money-lenders, the finance minister's announcement will yield fruit only if the benefits reach the needy farmers.

According to the government estimates, only 27 per cent of the farmers are learned to have access to formal lending sources like commercial and cooperative banks.