Objections to loan waiver scheme

I read that the financing of the loan waiver scheme announced in the budget has been firmed up. The FM will disclose this to parliament on March 14.

I have been a guarded supporter of the scheme as readers of this blog would know. I think it's a good scheme as long as the burden is borne by the government and not by the banks.

In the meantime, I have seen a barrage of criticism, mostly misplaced. In TOI on Sunday, Gurcharan Das called the scheme 'immoral' saying that the government should not break the bond of commitment that the borrower has towards the lender. As immoral, I suppose, as the US Treasury which has asked banks to restructure many of the sub-prime debts.

The contractual relationship between borrower and lender is redone all the time- it may not be at the best of the government. But when this happens to businesses, there's not a squeak from anybody. Think of some of the big names in Indian industry that have benefited from such restructuring, which often includes sacrifices from banks.

Das says that hereafter farmers will not have incentives to repay. Not true. As we know in the case of businessmen, you can get away with default only once. Once you default, you lose access to credit. So there are huge penalties to wilful default. This holds for farmers as well. I would only say that we should extend the newly created credit bureau to the rural areas and keep tabs on individual payment histories to strengthen incentives to repay.

Swaminathan Aiyar, writing again in the Sunday TOI, says that banks will hereafter be wary of making loans to farmers and such loans will be hard to come by. Not necessarily. Most of the bigger banks are government-owned. Both government and the RBI will be leaning on banks to meet loan targets (which is why rural credit has doubled in the past three or four years). Banks may try to get around this by avoiding small farmers but keeping separate targets for each category of farmer could address this issue as well.

Aiyar also says that farmers who have been repaid loans will be angry that others are being cosseted and this will cost the UPA dearly at election time. Do businessmen, who have repaid loans, get upset when businesses in distress get special treatment from banks? I don't know why farmers should behave any differently.

Subir Gokarn, writing in Business Standard, says that we need to ensure proper incentives hereafter giving a concessional rate on fresh loans to those who have made repayments this time. This makes sense- and indeed ties in with the idea of a credit bureau I mentioned above that will monitor payment histories.

The scheme brings a smile to farmers' faces. Banks will have their balance sheets cleaned up. Government can minimise the burden to itself by raising funds through disinvestment- and seeking the Left support for this, saying it's for a good cause. It's win-win for the most part. Who loses? Economists and columnists!