Loan waiver will impact adversely on repayment culture

In the Budget 2008 the finance minister announced Rs 60,000-crore farm waiver package to help the farmers who are in the debt. The practitioners of microfinance sector are looking at the impact the waiver package will have on the repayment culture in the country. They believe that the waiver package will have adverse impact and repayments are going to suffer as it is sending the wrong message across.

According to a member of a microfinance institution, “The message being sent across is that repayment is not important, since it makes a joke of those who have repaid”. Though, he said that since farm loans are a small portion of MFIs’ portfolio, the impact might not be much.

The scheme will come into force on June 30 as the operational guidelines of the scheme are yet to be finalized by Nabard and RBI soon. Nabard is the proposed regulator for the microfinance sector and has the largest self-help group (SHG) network in the country. The government is selling it on the panel of fresh flow of institutional credit to farmers, to keep the balance-sheets of banks clean. It is being expected that it will help in stimulating economic activity in rural areas.

If we see the past history of the loan waiver of 1991 the data shows that it had actually improved credit offtake and repayment. In RBI’s annual report of 1991-92, it has been stated the total amount of loan waivers claimed by banks, under the Agricultural & Rural Debt Relief Scheme, 1990, was Rs 7,800 crore.

A Nabard official said, “Farm loans constitute a small portion of the MFI portfolio, and are unlikely to have an impact. If farmers can avail subsidized farm loans at 7% from banks with a 2% subvention from the government, they are better off. The cheapest rate of interest offered by an MFI will be several times over considering the administrative costs.”

According to an internal source of industry, “By now, the microfinance sector has established a particular payment culture, independent of what is happening in the formal banking system. Small borrowers are aware of the prudence of regular repayments. After all, the recovery rates in the sector have been fairly high. In any case, the spread of formal banking is still limited; a large part of the population is financially excluded.” The MFI network is an important part of a bank’s operations to reach out to the financially-excluded.

Under the farm waiver scheme, the marginal farmers who are holding up to 1 hectare and small farmers holding up to 2 hectares are eligible for a complete waiver of all loans overdue on December 31, 2007, and which remained unpaid till February 29, 2008. About quarter of 40 million targeted farmers will not be benefited from the loan waiver scheme because most are a part of the informal system of money lenders.

While other farmers are eligible for a one-time settlement (OTS) scheme for all loans that were overdue on December 31, 2007, and which remained unpaid till February 29, 2008. Under the OTS, a 25% rebate will be given against payment of the balance 75%.