Loan waiver – A strategic solution
The recent announcement of loan waiver created ripples in the banking sector. Bankers are aware of the impact of such decision. The sincere farmers, who are willing to work and try to repay bank loan will consider itself as disincentive and will turn out to be defaulter, which might affect a large segment of performing asset. The concern expressed by RBI Governor, Nabard Chief and Chief Minister of Maharashtra on the probable impact of such waiver on the existing agriculture portfolio is well appreciated. As per the existing mechanism, the outstanding loan in the account is adjusted by way of budgetary support and banks are also absolved of their NPA outstanding. In case of write off accounts, the amount is directly contributed towards profit of the bank.
The farmers also are not immediately benefitted by the waiver. Irrespective of the reason due to which the farmer defaulted, banks turnout to be credit shy and after a review of their history refuse to extend further loan to these farmers. The default could be for multiple reasons, starting from natural calamity, lack of demand, and utilization of fund for personal purposes, etc. The banks, with the existing infrastructure, are unable to monitor the accounts effectively and as a result of which there is misuse of the fund.
Normally banks allow one reschedulement of repayment terms. Since more than one restructuring changes the status of the account to NPA, banks are reluctant to extend further reschedulement of the loan. The waiver provides a relief to the banks because after the adjustment of outstanding balance there are no dues in the books of account and NPA percentage comes down.
It should also be appreciated that there are genuine cases where such relief is necessary, primarily if such defaults are due to reasons beyond the control of the borrowers. However, the existing machinery available to the banking system is not in a position to identify the real intension behind the default. During early 70’s banks engaged qualified agriculture graduates for effective monitoring, but due to growth of banking sector and introduction of VRS, bank management were constrained to utilize the services of the agricultural graduates (field officers, as they were called) in other segments of the banks. Their intense exposure in the field of agriculture was not fully utilized by the banking sector, as originally envisaged.
An Alternate strategy
It is construed that the farmer became defaulter due to genuine reason and it is necessary to extend support to the farmer. The loan waiver should be offered with additional credit within the existing framework of RBI guidelines ( extended in case of natural calamities etc) , after a thorough examination of the case and after ascertaining the feasibility of the project. After ascertaining the viability, the repayment period should be divided in to two parts. One is for regular repayment of the fresh credit provided and secondly an additional period of adjustment of dues in the adjusted account. The loan installment should be decided in such a manner that the aggregate period permitted is adequate to adjust the dues in both fresh loan account as well as adjusted loan account, after allowing reasonable amount for livelihood. The repayment schedule should be determined based on the revenue for the aggregate amount of loan. Over a period of time it would be possible to adjust both the dues, provided close monitoring of the account is done. In effect, although it is loan waiver at present, over a period of time both the loans will get adjusted (coterminous). The bankers can be given option to adjust the repayment in previous loan to be utilized towards subsidy in future loans by creating a reserve from the repayments received, so that Government will be partially absolved of providing subsidies in sponsored accounts. No subsidy is to be allowed in the fresh loan account till the outstanding due in the adjusted loan account is completed paid off. The proposal can be explained by the following example.
“Let us assume that the loan outstanding in the account as on 31.03.2016 is Rs 50000/-. After the waiver of the loan , the outstanding balance in the account is Nil. Fresh loan can be permitted to the extent of Rs 50000/-.Considering the repayment period as 5 years for the fresh loan, the total repayment period can be considered as 10 years. As per the accounting system, any credit in written off account, will add to the profit of the bank. The fresh loan outstanding will be adjusted in the ledger as per the proportion of fresh loan, the installment for the adjusted loan can be reflected in a memorandum ledger, which will exhibit an outstanding of Rs50000/- being the contingent amount outstanding in the adjusted loan account.”
Manpower management
The key to the success of the scheme is very close monitoring of the account and assessment of viability of the new project as well as prudent dispensation of the loan amount. The existing manpower available in the banking system may not permit such deployment. It is suggested that the country have very good pool of resources of experienced bankers, who are now retired, but still competent to offer their services. Government /RBI can ask for voluntary service of pensioners, who are willing to take up such assignments in the respective locality. They may be offered out of pocket expenses and reasonable fees for assessment of viability and monitoring of such accounts. Primarily the officials engaged should identify willful defaulters and make a list of farmers who are not eligible for the waiver. The benefit will be provided to exclusively to the borrowers who had utilized the fund for genuine productive purpose and created assets against the loan sanctioned.
Presently RBI engages retired bank officials to provide consultancy to small loans, but such availability is limited to certain metro centers only. Considering the fact that it would be convenient for the retired bank officials to extend services in the close vicinity of their residence, they may be allowed to function in areas close to their residence , so that cost incurred will also be less.
The proposed scheme is likely to be beneficial to all the stake holders. Farmers with genuine intention will be benefitted, the willful defaulters will be identified and delisted, government will be support genuinely needy farmers, the bankers will be able to improve their agricultural exposure, the existing farmers, who are repaying bank dues, will feel motivated. The counseling offered by the superannuated bank officials will contribute to the agriculture segment.
