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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Why do economists frown at farm loan waivers but keep quiet when massive corporate bad loans are written off?

If bad loans of indebted farmers had been waived perhaps they would have escaped committing  suicide. 

This picture is of a congregation of farm widows in Punjab

No sooner did the Maharashtra Chief Minister Uddhav Thackeray announce a farm loan waiver that is expected to cost anything between Rs 45,000 to Rs 51,000-crore, mainline economists have warned of the rising NPAs of the banks and the strain it causes to the already precarious fiscal position of the State governments.

But strangely, the same questions were not raised when almost a month back, in early December, the Minister of State for Finance Anurag Thakur had in a written reply in Parliament, stated that public and private sector banks have written-off Rs 80,893-crore during April-September 2019 period. According to news reports, when asked who the beneficiaries were, the minister replied: “As borrowers of loan write-offs continue to be liable for repayment and the process of recovery of dues from the borrowers in written-off loan amounts continues, write-off does not benefit the borrower.”

It is true that write-offs are not exactly waivers since it only means that the bad loans are shifted from the bank books to another ledger while the recovery process continues. But the write-offs certainly do benefit borrowers. Let’s be clear, it is not as if the entire bad debt is recovered by banks. The percentage of bad assets that the banks are finally able to recover is far too low. As per the RBI, the rate of recovery of bad loans had come down from 18.4 per cent in the financial year 2014, to a low of 12.4 per cent by March 2015. It further declined to 10.3 per cent in the financial year ending March 2016. To illustrate, out of an outstanding amount of Rs 221,400-crores of bad loans in 2016, only Rs 22,800-crore could be recovered. It will be interesting to know what happened to the remaining Rs 198,600-crore.

Although under the Insolvency & Bankruptcy Code (IBC) 2016, the recovery of bad loans has shown a marked improvement – from 49.6 per cent in 2017-18 it has trailed to 42.5 per cent in 2018-19 – a total of Rs 70,819-crore was recovered against a pending amount of R 1.66-lakh crore for 1,135 cases admitted before National Company Law Tribunal (NCLT) for insolvency resolutions in 2018-19. Add to this recoveries made through other routes like Lok Adalats, Debt Recovery Tribunals and SARFAESI Act, the scheduled commercial banks managed to recover only Rs 1.26 lakh crore from a total outstanding of Rs 8.15-lakh crore in 2018-19, which shows to be only 15.5 per cent. With the actual recovery being dismal, it is the banks which end up taking the hit. No wonder, the government had two years back announced a bank recapitalisation programme of Rs 2.11- lakh crore to bailout banks, followed by another Rs 70,000-crore in 2019.

Against these corporate write-offs, farm loan waivers in the past six years total to Rs 2.85 lakh crores (adding the proposed Rs 45,000-crores waiver in Maharashtra). Compare this with just 354 liquidation cases pending for 2020. According to a news report, the claims for liquidation in respect of these companies stand at a staggering Rs 3.55-lakh crores. As per the data available with Insolvency and Bankruptcy Board of India only 4 per cent of this will be realised, which means only Rs 15,165-crore. Banks are staring at zero realisations in many of the insolvency cases pending.

While the bank write-offs affect a limited number of borrowers, a significant number of them being wilful defaulters, Maharashtra’s farm loan waivers are expected to benefit 44-lakh small and marginal farmers. Drawing from the experience of Punjab, Maharashtra has decided to waive bad farm loans up to an outstanding of Rs 2-lakh for each farmer. The problem with the Punjab farm loan waiver scheme is that only outstanding loans up to an exact Rs 2-lakh are waived, which means if the outstanding bank amount exceeds Rs 2-lakh even by Rs 500 the farmer will not get the waiver. This has led to a lot of resentment among Punjab farmers. I only hope Maharashtra is not following the Punjab example in letter and spirit.  

Coming at a time when a continuing drought was followed by heavy rains, a phenomenon termed as ‘wet drought’, standing crops in 70 lakh hectares are feared destroyed in Maharashtra. According to revenue estimates, almost 85 per cent of the kharif crops in Marathwada region were destroyed. While more than 1-crore farmers were affected from the incessant post-monsoon rains, the State had assessed the crop loss to be more than Rs 5,000-crore. Officials say Rs 6,552-crore has so far been distributed as crop loss compensation.

With farm distress continuing over decades, Maharashtra has turned into a hotbed of farmer suicides. In November 2019, a record 300 farmers had reportedly committed suicide. In the 6-year period between 2013 and 2018, an RTI response showed 15,356 farmers had committed suicide. It is generally agreed that the distress is primarily because farmers have continuously been denied their rightful income. An OECD-ICRIER study shows, between 2000 and 2016, Indian farmers lost Rs 45-lakh crore for not being paid the right price. In the past seven years, as per Niti Aayog calculations, growth in real farm incomes had remained at ‘near zero’. In such a depressing farm scenario, farm debt has continued to multiply. Farm loan waivers therefore provide an immediate relief. #  

Maharashtra farm loan waiver justified. Deccan Herald. Jan 10, 2020
https://www.deccanherald.com/opinion/in-perspective/maha-farm-loan-waiver-justified-793003.html?fbclid=IwAR0PWj9nAgIvBaYmOavApo5dki8rxd5drGspux37gTS7hVwarl1ZV9OyEjM

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