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Fine-tuning loan waiver

Finance Minister P. Chidambaram’s recent exhortation to public sector banks to take over the loans that farmers owe to moneylenders is to be seen as a follow up to the loan waiver scheme announced in the budget. It is meant to widen the benefits of the scheme for small and marginal farmers. Government-owned banks were originally asked to write off these loans in stages. After some confusion, it was clarified that the government will reimburse the banks for the write-offs. That has helped in blunting one of the original points of criticism of the scheme — that it was silent in the critical area of funding. However, the scheme does not cover loans taken from moneylenders and other non-institutional sources. It is well known that moneylenders with their easy access and informal procedures have for long played a dominant role in meeting the credit needs of rural India. They have been the preferred source for some types of loans even if they happened to charge usurious rates of interest. As several committees and expert groups have pointed out, it has been difficult to free framers from the clutches of moneylenders. A more recent report by an expert group has noted that the distressing phenomenon of farmers’ suicides is linked to their borrowings from moneylenders.

Under the loan waiver scheme, banks can lend afresh to the borrowers whose loans were written off. The Finance Minister’s swap proposal is no doubt laudable since it would bring down the volume of non-institutional credit and also ease the burden of many farmers over and beyond the benefit that would accrue from the loan waiver. Yet there could be many practical difficulties. Recent reports indicate that the modalities of even the loan waiver scheme have not been finalised. Managers of banks in rural areas have not received the necessary guidelines. Repaying moneylenders would obviously come later. Also, the Rs.60,000 crore earmarked for the waiver might fall short of requirements. Already there is an intense clamour for widening the coverage of the scheme and, in an election year, the government will find it impossible to resist such demands. Over the medium-term at least, there is no option except to extend the reach of the formal banking system to every nook and corner of the country, and equally important, make its procedures less rigid and in tune with the practices in the rural areas. Clearly some new ideas and strategies, now in an experimental stage, may well deliver. For instance, the rural bank branch model could be made viable by using technology. The Finance Minister’s advice to banks is relevant in this larger context.

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