The State Bank of India may have beaten a hasty retreat on its decision to stop financing tractors and other farm implements under mounting political pressure, but the issues that this aborted move has exposed remain valid and need to be debated.
The SBI's action was, indeed, in response to a sudden spurt in the repayment default rate of the farm loans as reflected in burgeoning non-productive assets (NPAs) of the bank, especially after the announcement of the Rs 60,000 crore (Rs 600 billion) farm loan waiver scheme by Finance Minister P Chidambaram in his 2008-09 Budget speech in February last.
Significantly, the SBI is not alone in facing such a situation; other banks and financial institutions, including the cooperative banks, are equally affected, and therefore, could have made similar moves.
Though such a chain reaction has now been averted but that cannot be taken to mean that either the SBI or other banks would continue their agricultural credit business the way they have been doing in the recent past.
For, they have already turned wary of such lending and are likely to remain so till the circumstances that had forced the SBI to take this step remain basically unchanged.
A similar reaction from the banks was witnessed in the wake of the previous farm loan waiver move of the then Deputy Prime Minister, Devi Lal, in 1989-90.
What is really worrisome is that, as in the past, the present situation, too, may cause a reduction in the overall flow of bank credit to the farm sector which had, for the first time in the last financial year, surpassed the 18 per cent priority sector lending benchmark set by the Reserve Bank of India.
The net result, predictably, will be a slow-down in farm mechanisation, adversely affecting agricultural production and, more importantly, the much-needed capital formation in the rural sector.
Indeed, the government needs to realise that a populist move like a debt write-off blights the loan repayment culture with long-lasting adverse repercussions.
This largesse has converted even the honest farmers into willful defaulters in the hope of getting their debts set aside. Those who take loans for tractors and power tillers are neither small farmers nor incapable of repaying the loans as most of them use such equipment for specific usage and earn regular income from them.
Besides, they are also not habitual defaulters as they know that this would debar them from seeking fresh credit. It is, thus, the anticipation of debt relief, coupled with some in-built loopholes in the loan waiver scheme, which has prompted them to withhold the repayments.
Moreover, the banks are finding it difficult to determine who qualifies for the loan write-off and who for loan settlement (with a 25 per cent rebate on repayment of three-fourths of the amount) because unambiguous records of land holdings are not available in many states.
There is also room for political interference and other influences in the identification of beneficiaries of debt relief, further encouraging repayment defaults.
The most disquieting aspect of the present state of affairs is that, unlike the SBI, the government cannot be expected to retract its debt relief move with general elections not far away.
The political exigencies are, unfortunately, likely to overwhelm the need for undoing the damage to the agricultural credit sector. At stake, therefore, is the much-needed resurgence of the Indian agriculture.
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