Since I’ve already expressed dismay and bad language about the debt waiver, let me expand a little.
(Writing this in a rush, so it won’t be entirely accessible to lay readers. Sorry about that. If you’re interested but confused, ask, and I’ll try to explain in the comments.)
For now, let’s ignore the fact that this rewards farmers who took bad decisions and punishes the farmers who’ve actually been diligent about repaying their loans, and so it’s set up all sorts of moral hazard. Let’s accept that indebtedness is making the poor suffer, that ending suffering is of prime importance, and that the ends justify the means.
There are problems with that at many levels. First, Ajay Shah points out, this will write off the debt of people who own land, while the poorest of the poor don’t own land. This is helping the not-quite-rich, not the poor.
Over and above that, Business Standard had a report (not linking it, because it’ll disappear in a few weeks anyway) on how this doesn’t help the most heavily indebted farmers, because their landholdings are so small they can’t get bank loans, and have to rely on moneylenders. This whole waiver is only going to end up benefiting large landholding farmers – not very well off, but certainly not the poorest of the poor, and the ones who’re suffering the most.
(Of course, all this assumes that the money allocated will actually go completely towards writeoffs. I’m not even sure where the 60,000 crore rupee figure came from.)
The second shady thing about the waiver is that there are no details on how the mechanics of it are going to work out. I think O P Bhat or someone has said that the loans are going to be swapped with government securities.
If this is true, it presumably means that a 60,000 crore rupee provision for credit losses spread across the banking system is magically going to turn into 60,000 crore rupees of capital. In effect, SBI and other PSU banks (or as Percy Mistry calls them, SOBs) are having their balance sheets recapitalised. And this is not being done through the capital markets, but by soaking the taxpayers. Nice.
I’ve just talked to Skimpy about this, and he’s pointed out that there are flaws in the details:
- Chidambaram might not give 60,000 crore rupees of G-secs for 60,000 crore rupees of bad debts. So the net worth could still fall.
- Against 60,000 crore rupees of bad loans, the actual provisioning might not actually be 60,000 crore rupees. I’m not sure about the current RBI rules for provisioning. I am tempted to leave this as ‘an exercise for the reader’, since I’m still too busy at work for the next month or so to devote time to finding out how much you have to provision, and what various swap ratios would be like. On the other hand, if the loan waiver is against provisions and not actual bad loans, then my point still holds.
- Chidambaram has apparently said that the waiver will be carried out over the next three years. So there may not be a waiver after all.
Fine. Readers, I leave it as an exercise to you, since I will be busy with mobile handset distributors and telecom switch importers and generic drug manufacturers over the next month.
But if my fundaes are correct, the loan waiver is stunning. If the government divests its stake in SOBs after doing this, it’s basically going to get a better valuation, which the taxpayers have funded. So the public at large will pay to get a better performing bank, when the risk should really have been taken up by people like ARCIL. Very, very shady.
Posted by Aadisht