BUYING VOTES INTELLIGENTLY
The finance minister’s farm loan waiver has been seen as a blatant attempt to buy votes; and so it is. He did not buy the votes with his own money, but the taxpayer’s. But there was another reason for the loan waiver: it was meant to rescue banks that had given loans to farmers who were not paying them back. It was compensation for bad loans, such as Manmohan Singh had doled out earlier, except that this time it applied only to defaulting farmers and not all bad debtors. From what I have come to know of the inner workings of a bank, it looks possible that the pressure for the loan waiver came from some of the biggest government-owned banks. Loans they had given out to farmers had turned bad, and they wanted to pass off the loans to the government.
The government’s insistence on bank loans to the priority sector is almost as old as bank nationalization; and agriculture was one of the first industries included in the priority sector. However, there were problems in giving loans to a farmer. Farmers’ land can usually not be attached, and is useless as collateral. Their crop could be collateral; but it could not be sequestered. If the farmer harvested the crop and sold it off in the market without the bank’s knowledge, there was nothing the bank could do.
Tractors, however, were excellent collateral. They were expensive, and could support a loan of a few lakhs; the bank manager could tote up considerable business with little effort. A tractor was useful in cultivation; a farmer was unlikely to sell it off just to cheat a bank. A tractor had to be registered, and hence its ownership was recorded even if the farmer sold it off or it was stolen, there was a fair chance of its being traced.
So the bank worked out a standard drill for loans against tractors. The first thing they looked at was the NPA record of a branch. There was always a possibility that bank employees would give loans to crooks for a bribe; and even if they were honest, it was possible that farmers of some areas were more likely to be crooked. So if a branch had a high level of NPAs, it was not allowed to give new tractor loans. Next came the landholding of the farmer. The more substantial it was, the more creditworthy he was considered. And finally, his record of creditworthiness. If he had defaulted or had not kept to the repayment schedule of earlier loans, he got poor marks. He and his bank branch had to get a certain minimum score before he could get a loan.
This scorecard proved awkward as a bank’s business grew. As its loan book multiplied, so did its priority lending have to; it had to find more farmer clients somehow. As it exhausted the stock of solvent farmers, it could no longer avoid less solvent ones. So the bank did something ingenious. It separated the business of giving new loans from that of recovering bad loans. Branches were absolved from the task of recovering loans, and told to concentrate on giving new loans. They could then forget that a farmer was not a good risk, and leave such considerations to the recovery department.
The separation of loans and recovery was a perfect recipe for contracting bad debts. At the end of March, State Bank of India could congratulate itself that it had given Rs 70,000 crore in loans to 42 lakh farmers. Apparently, 90 per cent of tractors sold are bought with a loan. State Bank’s tractor loans came to Rs 7,000 crore; 17 per cent of them had turned bad. So on May 16, the management sent out a circular putting a stop to further tractor loans.
Chidambaram had issued the loan waiver to get votes; State Bank’s circular threatened to put off voters. Vyalar Ravi is reported to have shot off a letter to Sonia Gandhi pointing out the stupidity of the State Bank. Tractor Manufacturers’ Association wrote to the finance ministry protesting against such an anti-farmer circular. State Bank’s own staff association protested that stopping tractor loans would throw farmers into the lap of moneylenders. Then the State Bank realized that the whole point of Chidambaram’s waiver was to convert bad debtors into good ones; once the loan waiver came through, all the farmers who had reneged on their loans would be purified and become eligible for new loans. So the management withdrew the circular.
Does the State Bank face such a shortage of solvent farmers? Other banks do not seem to; their bad debt portfolios are much smaller. Apparently, Corporation Bank, which had given out Rs 3,000 crore in agricultural loans, has a bad debt portfolio of 2.5 per cent. Andhra Bank, which has lent out Rs 230 crore, has bad debts under 0.5 per cent.
State Bank’s high bad debts may have something to do with internal management. Being the largest bank, it tends to be extremely rule-bound; it does not give much initiative to branch managers. Since it has an enormous staff, promotions and transfers are big business in it, and not many people stay in the same job for long. That also militates against development of local expertise and makes it impossible to fix responsibility for poor decisions.
But irrespective of State Bank’s own problems, farm loans are subject to high risk, and giving them against tractors does not reduce the risk materially. Giving loans to farmers is not the best way to finance tractors. Tractors owned by farmers are likely to be underutilized; the smaller a farm, and the fewer the crops it takes, the greater the underutilization. Tractors are likely to be more fully utilized, and to give a better return, if they belong to firms that rent them out. Such firms can own more than one tractor; that would also result in economies in the maintenance and repair of tractors. In Indian villages, tractors are put to many uses besides ploughing; they are really general-purpose transport vehicles. That is another reason why they are likely to be better used in the hands of those who rent them out. This argument applies even more strongly to combine harvesters, which cost much more and which therefore need to serve a larger area of land than a tractor to be remunerative.
So it is possible that the State Bank’s farm lending strategy is too passive, and that the best way of financing agricultural activity is to give credit, not so much to farmers as to lessors of equipment. They do not normally exist in Indian villages. But they can be created; if a bank finances them, they will come into existence. One reason why this does not happen is the government’s fixation with farmers — a fixation that is reflected in the farm loan waiver. What matters is not how much farmers borrow, but how efficiently they can buy services that loans to them are supposed to finance. As the finance minister is fond of saying without meaning it, what matters is not the outlays, but the outcomes.
