Why can't banks take 'haircut' of petty dues of farmers?

Lakshminarayan is a farmer from Shimoga in Karnataka. He had taken a loan of Rs 35,000 from a local branch of Canara Bank. About a month ago, he received a threatening call from the bank asking him to pay back the pending dues or they will be forced to initiate action for recovering the amount. Panicked, he decided to rush to the bank, and knowing no bus was available at that time, he walked for 15 kms in a hilly terrain to finally reach the bank.

At the bank, he was told to pay Rs 3.46 of the pending loan amount.

This story is a grim reminder of the double standards the banks have in place when it comes to treating their customers. While the poor often receive inhuman treatment, which forces many of them to either land in jail or to commit suicide, the rich are treated with kid gloves and are allowed to easily get away with the bank itself taking the blow. Take the case of State Bank of India (SBI). According to a news report, the bank had written-off Rs 1.23-lakh crore of corporate bad loans in the past eight years. Despite we being told that technically speaking a bank write-off is not a loan waiver and the recovery process continues, all that the bank has been able to recover in these eight years is Rs 8,969-crores which come to a little over 7 per cent of the outstanding credit.

The biggest defaulters in this particular case being Bhushan Power & Steel Ltd with a outstanding loan of Rs 7,705-crore and Videocon Industries Ltd with pending dues of Rs 3,411-crore. As per an RTI reply, both the companies had failed to pay back even a single penny. In fact, out of the 56 borrowers, the list that was made available, the recovery from 36 companies was zero. For a balance of Rs 3.46 a farmer was asked to come to the bank and pay it up, but what happened to the 36 companies from whom SBI failed to recover even a penny?

Another news report, based on an RTI reply, had revealed that only 10 per cent of the bank loans written-off in four years, between 2015-16 and 2018-19 have been recovered. Out of a total of Rs 4,32,584 written-off in these four years, public sector banks could recover only Rs 45,659-crore. If 7 to 10 per cent of the total amount that is eventually what the banks are able to recover, the question that arises is why are banks trying to give an impression as if the write-offs of corporate debt is in any way different from the farm loan waiver? Using the ‘technical’ difference between a write-off and waiver banks have always maintained that writing-off bad loans does not mean that the recovery proceedings have stopped is in reality a very clever smoke-screen that is enacted to cover up the massive corporate defaults.

Strangely, this ‘technical’ cover up became a banking tradition over a period of time. But prior to that the RBI had in a circular issued to banks advised them to refrain from the practice. “Banks are required to extinguish all available means of recovery before writing off any account fully or partly. It is observed that some banks are resorting to technical write-off of accounts, which reduces incentives to recover. Banks resorting to partial and technical write-offs should not show the remaining part of the loan as standard asset.” Probably to cover its own lapses, banks have routinely been claiming that the write-off is simply a shift of the accounts from one ledger to another while the recovery goes on. But many banking experts believe that when bad loans are written-off banks actually remove the assets from the balance sheets knowing well they have lost all hope from recovering anything. 

This brings up a question. Why the banks should not be asked to first clear all options of recovery before announcing a write-off? Why deliberately create confusion in the minds of the people (as well as policy makers) by presenting a misleading picture of bank profits position by pushing the losses in a separate ledger? This is a mischievous practice and needs to be discontinued. I think the RBI needs to come heavily against the banks for this deliberate cover-up. But instead, banks are exerting pressure to set up a bad bank that takes care of the bad loans. Which means instead of addressing the fundamental reasons behind the malaise of increasing bad loans, banks are wanting another cover-up. Setting up a bad bank, in my opinion, is a bad idea.

In April, the Reserve Bank of India (RBI) informed that Rs 68,067-crore which were due from 50 wilful defaulters over the years has been written-off by nationalised banks. Many absconding businessmen, including the diamond merchant Mehul Choksi, are among them. Wilful defaulters are those who have the ability to pay back but don’t do so. Many banking experts have called for launching criminal proceedings against them, but it hasn’t been ever done. All India Banking Employees Association general secretary C H Venkatachalam was earlier quoted in media reports, saying: “It is known that bulk of these bad loans are attributable to big businesses and the affluent. Many cases of default are found to be deliberate, wilful and on account of diversion of funds. Unfortunately bank loan default is still a civil offence and hence criminal proceedings are not being instituted against them.”

Launching criminal proceedings against the wilful defaulters should be first step to stop banks being duped heavily by the rich and powerful. I wonder why the farmers continue to be penalised for petty loan defaults, while the rich get away so easily. If banks can take ‘haircut’ for thousands of crores of company defaults, I wonder why the banks can’t in general, and in this case Canara Bank in particular, take a ‘haircut’ of Rs 3.46? Why make a poor farmer travel all the way, spend a day’s hard labour, for just depositing a petty amount? When will the banks become a little sensible? #

Games Banks Play. Orissa Post. July 24, 2020
https://www.orissapost.com/games-banks-play/

कर्ज वसूली में दोहरा मानदंड, बता रहे हैं देविंदर शर्मा. Amar Ujala, July 23, 2020
https://www.amarujala.com/columns/opinion/double-standards-in-debt-collection-by-banks

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The noose of blank cheques around farmers neck

Gurpreet Singh is a small farmer from Kishangarh village in Moga district of Punjab. He owns 3.5 acres of land and had defaulted in repaying an instalment on a Rs 5.6-lakh crop loan that he had taken from State Bank of India (SBI). A year ago, he was sentenced to two years rigorous imprisonment for two years. His fault, he had failed to make repayment as per the schedule. “As I had an SBI account, they took blank cheques from me,” he told the Indian Express.

Gurpreet Singh is among thousands of farmers who have been served legal notices under Section 138 of the Negotiable Instrument Act, 1881. Hundreds of them have served jail terms over the years and numerous others are on bail and await trial. In all cases, the modus operandi is the same. Banks take blank cheques from farmers at the time when they seek loans, and fill in the amount due when it becomes apparent that farmer is unable to repay an instalment, and file for a criminal case. What should otherwise be a civil case thereby turns into a criminal offence, which I think is patently wrong. “Almost 99 per cent farmers’ who draw loans from the banks, whether private, cooperative or nationalised, and fail to pay back face this ordeal, “says Bharti Kisan Union (Ugrahan) leader Sukhdev Singh Kokrikalan.

Seven farmer unions had joined hands against the unsavoury practice by banks of using blank cheques to recover the unpaid dues. “These days, banks are taking triple securities from farmers – pledging of land, signing by a guarantor and blank/post-dated cheques, “Buta Singh Burjgill, president of the BKU (Dakunda) faction was quoted in a newspaper. While numerous reports have appeared from Haryana, Uttar Pradesh, Rajasthan and Madhya Pradesh of public auction of farm lands or tractors mortgaged with the banks, it is invariably the blank cheques that land more and more defaulting farmers behind bars in Punjab. This is primarily because Punjab has banned auction of mortgaged land or ‘kurki. Even this is denied by farmers who say that ‘kurki’ orders are issued frequently but it’s only because of pressure from farm unions that auctions are not allowed.

Now compare this with Mudra loans. Minister of State for Finance Shiv Pratap Shukla informed Parliament that loans worth Rs 7,277.31-crore of public sector banks till March 2018 under the Pradhan Mantri Mudra Yojna (PMMY) had turned bad. Subsequently, an RTI revealed that Rs 11,000-crore of Mudra loans belonging to 13.85 lakh account holders had turned into non-performing assets (NPA) till Aug 3, 2018. Interestingly, while the government has set up a Credit Guarantee Fund for Micro Units (CGFMU) which guarantees payments against default in micro loans up to Rs 10 lakh to eligible borrowers, no such provision exists for defaulting farmers. Bad loans of Punjab farmers are in reality far less when compared with Mudra loan defaults.

Strange, while post dated/blank cheques are taken from farmers at the time of applying for bank loans, there is no such condition for Mudra loans. In fact, borrowers don’t need to pay processing charges or offer any collateral. Or else 13.85 lakh borrowers who have defaulted on Mudra loans would have been served legal notices, and hundreds of them would have been behind bars. Therefore the question that arises is why the practice of taking blank cheques at the time of granting a loan only confined to farmers? Is it because given the level of illiteracy and economic depravity, farmer is a soft target?   

Take the case of the new scheme offering loans up to Rs 1-crore within an hour, or 59 minutes to be exact. For the medium, small and micro-enterprises (MSME) an automated, contact-less provision has been enacted for providing loans from Rs 10-lakh to Rs 1-crore. For these loans, collateral is not mandatory considering that these loans are covered with a Credit Guarantee Fund Trust for Micro and Small Enterprises (CGFTMSE).  Again, if the State can act as a guarantee for defaults for MSME business loans, I see no reason why a similar guarantee fund should not be created for farm loans. After all, farmer is an entrepreneur and farming too is a business activity.

Bank’s argument that the practice of obtaining blank cheques serves as a security for farm loans is in fact discriminatory. The high handedness being shown by banks to use the blank cheques from gullible farmers so as to easily convert these civil cases into criminal, defies any logic. Meanwhile, Punjab’s Cooperation Minister Sukhjinder Singh Randhawa, who after prolonged negotiation with agitating farmers and bankers, has assured that banks will withdraw cases and return blank cheques back to farmers owning up to 5 acres of land and loan up to Rs 10-lakh. Roughly about 6,000 small farmers will benefit if the bounced checks are returned back, but protesting farmers want this practice to be withdrawn completely.  

Although banks have promised before the Punjab & Haryana High Court to return blank cheques for the small farmers in a week or so, I don’t see any reason why the practice of drawing blank cheques is not completely dispensed with. Banks cannot be allowed to wilfully exercise a discriminatory policy against farmers. There have been cases when banks have attached farmer’s pension to recover outstanding dues. According to National Crime Record Bureau statistics, 80 percent indebted farmers who committed suicide in 2015 had taken loans from banks and registered microfinance institutions. This defies the common understanding which blames private money lenders for adopting unlawful recovery tools.

Farming is a risky enterprise, which operates under difficult economic as well as climatic conditions. But the dual approach adopted by banks to recover outstanding farm loans from farmers using coercive means, while going soft on massive corporate loan defaults besides other business loans, clearly shows that the credit policy is designed to benefit the rich at the cost of the poor. Let me illustrate. As per a report presented by the Public Accounts Committee of Parliament the total outstanding loans of the public sector banks, termed as NPAs, stood at Rs 6.8 lakh crores in March 2014. Out of this, 70 per cent belonged to the corporates whereas only 1 per cent default was of the farmers. Corporate NPAs presently stand at a whopping 10.3 lakh crores. Did we ever hear of any of the corporate defaulter going to jail for bounced cheques? #

The noose of blank cheques around around farmers. The Tribune. Feb 26, 2019

https://www.tribuneindia.com/news/comment/the-noose-of-blank-cheques-around-farmers/734792.html?fbclid=IwAR3GHTLP6-veVt3aw4klj-eqTIoeZHo8s0aHN99j8YzjEOqfbV0LFZx8HA0

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There are fundamental problems in the design of the crop insurance scheme

A well designed crop insurance scheme is the best safety net 

Pradhan Mantri Fasal Bima Yojna (PMFBY), the flagship programme launched with much fanfare in 2016 has run into rough weather. With both the area covered and the number of enrolled farmers declining, the country’s premium crop insurance scheme is certainly in need of an overhaul.

While the Parliament’s Committee on Estimates, chaired by the senior BJP leader Murli Manohar Joshi, has in its latest report called for re-formulation of the agricultural insurance scheme, seeking transparency in its working and asking for more financial allocations to attract increasing participation from farmers, there are fundamental flaws in the design of the scheme that renders it rather ineffective.

At a time when farm gate prices had remained subdued over the past few years, and when fluctuating climatic conditions – drought, floods, as well as freak weather patterns including hailstorm, strong winds etc. had flattened the standing crop at many a places, PMFBY could have come as the much needed safety net. But a badly designed crop insurance programme has failed to come to rescue of the beleaguered farming community. Take the case of Haryana, where standing crops in 1.85 lakh acres in 15 districts were damaged in September by heavy rains and resulting floods. Interestingly, while the revenue estimates of the crop damage are ready, the crop losses suffered do not tally with the crops that were insured by the private crop insurance companies. This is because the insurance companies just collected the premium amounts from the banks without actually doing a ground assessment to know what crops were under cultivation.

The government perhaps did not visualize that there were serious problems in the way the scheme was designed. The methodology itself was faulty. No wonder, some estimates show the enrollment under PMFBY has declined by 17 per cent, from 40.2 million in 2016 to 33.2 million by 2018. Instead of rectifying the forcible enrolment, as a result of which the premium amount is automatically deducted from the bank accounts of loanee farmers, the banks have now been asked to provide the premium amount (in case of irregular accounts) by giving an overdraft for which the farmers will also have to pay interest. The basic objective being to show an increase in the number of farmers enrolled. Forcible addition of number of farmers under the scheme should not be seen as a measure of its success.  

Once the premiums are collected, a threshold limit is ascribed for the maximum claim in the event of a crop loss. In other words, if the threshold limit is low, the claim a farmer makes would get him a fraction of the loss he incurs. To illustrate, let’s look at an example from Bundli district in Rajasthan. A study conducted by Centre for Science and Environment (CSE) had shown that for soybean crop farmers were insured for a maximum of Rs 16,539 per hectare against a maximum output value of Rs 50,000. Similarly for paddy, the maximum a farmer could be compensated for was Rs 17,096 whereas the output value stood at Rs 65,000. This is also linked to the process of auction that is adopted while estimating the losses to be insured. Companies first give their preference of the regions where they want to operate, and then an open bidding is held. As a result of selective bidding the gross premium swells. Such a flawed system of estimating premium amounts does not operate anywhere in the world. This defeats the basic purpose of bringing in 12 private companies for crop insurance. Instead of building competition among the private players, the design allows for monopolization and formation of cartels. 

I have never understood the rationale of treating village or village panchayat as a unit of insurance. Why can’t the compensation be paid treating the farm as a unit? Of course, the insurance companies would not like to undertake this arduous exercise but at time when remote sensing and drone technology is available, there is no reason why the insurance companies should not be directed to treat an individual farm as the base for insurance claims. Further, since 24 crop-cutting experiments are mandated for each district, four for major crops and eight for other crops, a total of 40-lakh crop cutting experiments are required to be held every year. This could have been a huge employment generation opportunity if the government had insisted that the companies create its own workforce rather than allowing outsourcing of its agricultural officials for the purpose. But then, who wouldn’t like making profits without making adequate investments. 


Fundamental flaws in crop insurance scheme's design makes it ineffective. LiveMint. Jan 9, 2019
https://www.livemint.com/Politics/vPD0hLee4cWmmoEVvQteRJ/Fundamental-flaws-in-crop-insurance-schemes-design-renders.html?fbclid=IwAR2ZYX80-STaq1tl5IvhtI6uCiC9Vo1P_8O4KjZUuI_7AFVwvPqa2zIJDYE

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