Debt waiver: Banks may get cash-bond mix

BUDGET 2008-09 IMPACT DAY-2

No repayment of interest on outstanding loans.

The Rs 60,000 crore farm debt waiver and relief package announced in the Budget may not be just in the form of special securities issued by the government, but involve actual money being reimbursed to them.

The banks may have to forgo all interest on the outstanding debt amount. The package is only aimed at recovering the principal amount of the loans extended to nearly 40 million small and marginal farmers across the country.

In addition, farmers availing of the loan waiver and relief package may have to agree to some conditions, including committing to not seeking debt relief again for a fixed period of time.

The banks will be reimbursed over three years from June 30, 2008. In effect, the Rs 60,000 crore may be given in at least three annual tranches. Similarly, the bond component may also be spread in tranches till 2011.

Senior government officials told Business Standard that the impression that public sector banks will lose out due to the debt waiver is misplaced.

"Banks will actually get strengthened as they now stand to get back at least their principal amount, which otherwise is currently shown as bad debt on their balance sheet. The additional liquidity will help them", he said.

However, officials said that the exact details of the debt waiver programme, the biggest hand-out in India's history, will take some time. "There are several options (to compensate banks without burdening the fiscal). We have four months to work that out. The details will be finalised", they added.

The rationale for June 30, 2008 being set as the deadline for implantation of the debt waiver and relief scheme is that the loans had to be cleared by that date. The scheme applies to loans disbursed by scheduled commercial banks, regional rural banks and co-operative credit institutions up to March 31, 2007 and overdue as on December 31, 2007.

Also read on Page 2: Sharad Pawar asks farmers not to repay money-lenders