Well-intentioned, but...

The agricultural credit package, unveiled by Finance Minister P Chidambaram, is well intentioned and avoids the primary danger of simply writing off farm loans "" as many had feared the government might be tempted to do.

In its essence, it is a variation on the theme adopted when announcing the policy for corporate debt restructuring "" under which quite a few business houses have worked out deals with banks and cleared clogged lines of credit.

Clearly, the hope is that the same can be done now for farm loans, since it is clear that credit lines are in fact clogged by the history of bad loans.

However, some of the questions raised by the announcement will be answered only over time, once the exact modalities are worked out by the chiefs of the National Bank for Agriculture and Rural Development (Nabard) and the Indian Banks Association (IBA), in consultation with the heads of commercial banks, regional rural banks and cooperative banks.

What is also notable is that the government has come out with the announcement without waiting for the Budget, and the hurry may have been caused by a desire to ensure its implementation before the kharif sowing.

If so, this objective is unlikely to be met, partly because crop planting operations are already under way thanks to early arrival of the monsoon, and partly because the new package cannot begin to get implemented before all the details are worked out.

Until that happens, the validity of some of the claims being made about the fiscal soundness of the package appears doubtful. For instance, it is stated quite clearly that there will be no waiver of any loans.

But, at the same time, the package stipulates a one-time settlement of loans taken by small and marginal farmers who have been declared defaulters. It is hard to see how this can be done without writing off a major part of their past dues.

It is interesting in this context that the policy does not make a similar offer to "farmers in distress", for whom relief is sought to be provided by clubbing interest with the principal and rescheduling repayment, spread over seven years with an initial moratorium of two years.

Similarly, the finance minister has categorically declared that the debt relief package will not involve violation of the prudential norms of the Reserve Bank of India (RBI).

But this seems to be contradicted by the package itself, which envisages that RBI and Nabard will relax prudential norms for this purpose.

Moreover, Mr Chidambaram's contention that the debt relief package would make agricultural lending commercially lucrative is hard to understand.

For, if the banks did not find it commercially desirable to lend to farmers when interest rates were as high as 18 per cent, how will the situation change for the better when they are forced to commit higher amounts at far lower rates?

Even last year, the public sector banks lent less than 7 per cent of their total net credit, to small and marginal farmers.