CREDIT CULTURE: What's That?

A few months ago, in the run-up to the general elections, a large bank could not continue with the recovery process of bad loans given to farmers and micro, small and medium industrial units in one region of an Indian state. The recovery agents were denied entry in that region by the workers of a political party. That’s not the end of the story. The party even worked out a loan-waiver formula, with the help of a chartered accountant, and circulated it among the borrowers, explaining who wouldn’t have to pay how much.

Later, at a state-level bankers’ committee (SLBC) meeting, a senior minister?of that state?told the bankers to start giving loans to farmers without checking their credit score.

SLBC is a body of lenders that work, coordinate and consult each other on banking development and social welfare initiatives in a state. It’s part of the Reserve Bank of India’s (RBI’s) lead bank scheme. There is a lead bank in every district of India. The purpose is to ensure effective and efficient use of banking facilities.

The bankers did not buy the senior minister's idea. They told the minister that if they needed to sanction and disburse loans to farmers without checking their credit score, they would adopt the so-called service area approach (SAA). A prospective borrower would need to collect no-objection certificates from local bank branches as a precondition to get the loan. The SAA scheme was introduced in 1989 to increase productive lending. The banks could stymie the minister’s idea after the RBI intervened.

In private, many, particularly in the public-sector banking industry, have been complaining about a sharp deterioration in credit culture. The villain of the piece is farm loan waivers, which often are a promise by different political parties ahead of elections. An IIFL Securities?Ltd?study estimates the amount waived across 18 Indian states in the past decade at ~3 trillion. Needless to say, this has spiked the non-performing assets in agricultural loans. Once a loan waiver is announced, even those who can pay have a strong disincentive to service their loans.

In the recent past, after the Telangana government announced a waiver of up to Rs2 lakh of crop loans, farmers of Punjab also demanded a debt waiver. The Telangana scheme, which will benefit 4 million farmers, would cost Rs31,000 crore. Five years ago, in 2019, the Punjab government had announced a crop loan waiver scheme to offer up to Rs2 lakh of relief to small and marginal farmers.

In the run-up to the general elections, a promise for farm loan waivers was in the manifesto of a national party. Its leader promised that the party would waive farmers’ loans in Punjab and entire India. He even said a commission would be formed to look into farmers’ woes, and their loans would be waived not only once but again and again, whenever farmers would need a waiver.

Since Independence, there have been nationwide farm loan waivers twice. The VP Singh government at the Centre announced the first loan waiver scheme in 1990. Called the Agricultural and Debt Relief Scheme, it waived up to Rs10,000 of loans of 32 million borrowers. The cost of the scheme was Rs7,825 crore. Almost two decades later, in 2008, the Manmohan Singh government announced the Agricultural Debt Waiver and Debt Relief Scheme worth Rs71,680 crore.

Incidentally, the first firm loan waiver in India was announced by a state – well ahead of the 1990 central scheme. Chaudhary Devi Lal-led Lok Dal government in Haryana wrote off loans up to Rs10,000 in 1987. This cost the state government around?Rs227 crore.

In the past decade, at least a dozen state governments have announced farm loan waivers, even as the contours of the scheme vary. One particular state waived only the interest, not the principal amount of the loans. Going by a 2023 State Bank of India study, Andhra Pradesh, Telangana, Uttar Pradesh, Maharashtra, Karnataka, Punjab, Madhya Pradesh, Chhattisgarh, Jharkhand and Tamil Nadu announced Rs2.52 trillion of loan waivers in eight years between 2014 and March 2022, benefiting?36.8 million farmers in these states.

Muhammad bin Tughluq (1325-51) is believed to be the first king to grant agricultural loans to farmers to help them fight distress. His successor Firoz Shah Tughluq wrote off these loans as famine and rebellion hit hard.

If the freebies announced in the run-up to the elections to woo voters are supported by budgetary provisions of states, why should bankers worry? After all, money is not flowing out of their coffers. That’s what the politicians would say.

Bankers know that such waivers at periodic intervals spoil the credit culture in multiple ways. Once a waiver is announced, even those who have the ability to pay stop paying. Also, borrowers start expecting a repeat in future and stop bothering much about timely repayments. Finally, there is a spillover effect. Once one state announces such a scheme, it affects the behaviour of borrowers in the neighbouring states too.

Indeed, the farmer community can get affected by natural calamities like cyclones, floods, draughts, et al, but making loan waiver an election promise is something bankers cannot stomach.

There is a twist to the tale. While lenders blame politicians, in private, for spoiling the credit culture, some lenders themselves are party to it. The RBI is aware of this and has already taken action against four non-banking financial companies (NBFCs).

I have recently come across this open letter written by the head of a microfinance institution (MFI) to peers. It’s an appeal to all MFIs expanding in Andhra Pradesh and Telangana.

This is a heartfelt request to all MFIs eager to start operations in Andhra Pradesh and Telangana. My intention is not driven by personal interests but solely by concern for the well-being of poor households and the long-term sustainability of the microfinance sector. I am not overly concerned about increased competition… However, I see troubling signs that could cause harm to both borrowers and the institutions themselves.

There are clear indications of a looming AP Crisis 2.0. In several locations, including operations by banks, NBFCs, mutually aided cooperative societies, and informal players, there are reports of more than 30 lenders active in a single area. In the aftermath of recent floods and persistent rains, some branches are reporting a portfolio at risk (PAR) as high as 20 per cent. Despite this, I continue to see advertisements in WhatsApp groups from institutions eager to establish new branches in these already saturated areas.

Andhra Pradesh and Telangana, with their higher GDP and per capita income compared to other regions, have seen the microfinance market significantly contract. Every player is competing for the same client, and the lending is happening through "ring leaders". Just recently, one of my branch managers shared an alarming story: When he went to collect an EMI, he encountered 24 motorbikes and 30 MFI staff, all of them collecting EMI from the same ring leader.

Incidents of borrowers approaching local legislators to intervene have escalated, with MFIs being strictly instructed not to enter certain villages. Entire communities have even taken oaths not to repay any MFIs. In several villages, migration is on the rise as people flee amid constant pressure from as many as 10 different MFI representatives. Tragically, there have even been suicide attempts aimed at intimidating MFI staff, and numerous cases of staff being physically assaulted…

This is happening because of the unchecked greed for growth among MFIs. It’s time to reflect. Enough is enough. While many of you might choose to ignore these warnings, I urge you to consider the consequences. The last time, the RBI came to our rescue. But this time, we may not have such a safety net.

I leave this to your wisdom and judgement.

Need I say more?

The writer, a Consulting Editor with Business Standard, is Senior Advisor to Jana Small Finance Bank Ltd. His latest book:?Roller Coaster: An Affair with Banking.

To read his previous columns, please log on to?www.bankerstrust.in

X: @TamalBandyo

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