On the 15th of March this year, SBI chairperson Arundhati Bhattacharya raised concerns regarding the farm loan waivers that was promised by some parties in UP election.
According to her, farm loan waivers disrupt credit discipline among borrowers and raise expectations that future loans too would be waived creating a cycle of non repayment.
Also implicit in her argument is that such loan waivers generate future wilful defaulters (ones who have enough income streams to repay the loan, but do not repay willingly).
Other prominent banking authorities have also joined this bandwagon. Bhattacharya’s arguments come at a time when Indian banking sector (both public and private) is in deep a mess with large unpaid loans(technically known as Nonperforming Assets(NPAs)), wilful defaulters and falling profitability.
A loan whose interest and/or instalment of principal remains overdue for 90 days is categorised as NPA. The size of NPAs has almost doubled to Rs 6,68,825 crore in September 2016 from Rs 3,40,556 crore in September 2015.
Both government and the RBI are continuously deliberating to solve this problem.
This year, in the Economic Survey 2017 (page no. 84) the government has acknowledged that banks with larger NPAs, especially public sector banks, narrowly avoided a banking crisis only because most of them were publicly owned by government.
The crisis was averted only due to the implicit backing of government ownership which ensured that depositors did not rush to withdraw their deposits.
Hired prize fighters and eternal drumbeaters supporting privatisation of public banks under the garb of reform must have felt like fish out of water.
Without any further digression, lets us address the main issue. The SBI Chairman’s projection of farm loan waivers as harbinger of credit indiscipline in banking sector is somewhat misplaced. It diverts public attention from fact that larger amount of NPAs and wilful defaulters are not from agricultural sector.
Most of NPAs and wilful defaulters are from larger industries such as mining and the service sector.
Data from the RBI Financial Stability Reports (June 2016) shows that most of the NPAs and stressed advance are from industries and services sector followed by agricultural sector and retail loans.
Stressed advance is the broadest measures of bad loans which includes NPA, restructured loans and write off loan. Restructured loans are bad loans whose terms and conditions are remodified for payment suitability of borrower. Write off loans are bad loans which are erased from the bank’s balance sheet.
Stressed advance ratio is the ratio of stressed assets to outstanding advance of banks.
Asset Quality in Major Sectors
The figure shows the distribution of GNPAs and stressed advance ratio across different sectors. It shows that after industry(11.9%), agriculture (6%) has second highest GNPA among all four sectors.
But stressed advance ratio shows that agriculture (7.4%) comes after industry(19.4%) and services (7.7%).
The discrepancies between GNPA and stressed advance ratio shows how the problem of bad loan is actually more endemic among industry and services.
It also shows that industry and service sector are getting more favourable deals in terms of restructuring of bad loans and write-off of loans.
But these figures have to be interpreted with caution. If we look at the composition of the total non-food credit at 2015, the share of agricultural loan is 13.5%, industry is 42.7% , service sector is 23.5% and retail loan is 21.2%.
Sectoral deployment of non-food gross bank credit outstanding (in Rs billion)
| Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 |
| Agriculture | 4157.41 | 4806.34 | 5466.26 | 5899.14 | 6659.79 | 7658.8 | 8829.42 |
| Industry | 13114.51 | 16045.76 | 19373.25 | 22301.79 | 25164.83 | 26576.27 | 27306.77 |
| Services | 7267.9 | 8942.01 | 10229.6 | 11518.86 | 13374.51 | 14130.97 | 15410.67 |
| Retail | 5856.33 | 6879.44 | 7828.35 | 8975.84 | 10096.89 | 11663.48 | 13922.16 |
| Total Non-food Credit | 30396.15 | 36673.54 | 42897.45 | 48695.63 | 55296.01 | 60029.52 | 65469.03 |
Source: DBIE-RBI, 2017
What is important to notice is that agricultural loan just consists of 13% of total non-food banking credit (Loan) so even if a Gross NPA of 6% in March 2015 (approximately Rs 529.7 billion) in agricultural sector will be less than 5.8 % GNPA of service sector (Rs 893.7 billion).
The figure for Industry GNPA is Rs 3003.6 billion (11.9 %). It shows that just comparing GNPA of different sectors without checking its share in total bank loan may give an incomplete and sometimes misleading picture that does not favour agriculture.
Stressed advances ratios of major sub-sectors within industry
The disaggregated figure for industry shows that stressed advance ratios for some sectors like basic metals is as high as 34% followed by construction at 27%, textiles at 21% , cement and their products at 19%.
These figures only tell us that industry, which takes the lion’s share of bank credit, is maintaining credit discipline.
Annual slippage of standard accounts to NPA category – Sector wise (January to December, 2016)
Annual slippage is calculated as ratio of standard advances turning into NPAs during the period to standard advances at the beginning of the period.
Similarly the annual slippage also shows those standard loans which are subsequently getting converted to NPA in fixed period of time is mostly from industrial sector and agriculture has very low value on it.
So, larger corporate borrowers are to be blamed not the farmers.
Share of large borrowers in SCBs’ loan portfolio
The figure shows that share of large borrowers (those who have taken loan of more than Rs. 5 crore) within total loan of scheduled commercial banks has remained same in between March 2015 to March 2016.
But with regards to total GNPA, that of banking sector has increased from 72.8% to 86.4%. Such is the concentration of bank NPA among big borrowers that just top 100 borrowers consists of 16% of total bank loan and 22.3% of Gross NPA.
The National Sample Survey Office (NSSO) which conducted Situation Assessment Survey of Agricultural Households in its 70th round (January – December, 2013) shows that average of amount of farm loan is just Rs. 47,000.
This estimate is inflated as it includes loan from both institutional (bank, co-operatives, MFI) and non-institutional sources (money lenders).
Since average amount of farm loan falls far below amount of Rs 5 core, the figure shows that the problem of bad loans cannot be attributed to loans taken by farmers.
Not every GNPA can be interpreted as a deliberate form of credit indiscipline as borrowers may be unable to repay their loan due to genuine unforeseen or external economic developments beyond their control.
It is argued that big firms and companies contribute to economic growth and must be treated leniently while recovering their loans. But agriculture that provides food security to the country, employs large mass of rural labour force, and creates forward linkages to industry is not shown same lenient approach while dealing with their bad loans.
Wilful Defaulters: Source of Colossal Credit Indiscipline
Wilful defaulters are categories of borrowers known for creating the worst form of credit indiscipline among bank borrowers as they have sufficient income flow but prefer not to repay the loan.
Since RBI does not provide data on wilful defaulters, the two prominent sources of getting information is CIBIL and All India Bank Employees Association(AIBEA) website. Research shows that problem of wilful defaulters are endemic in the Indian Banking sector.
The latest data provided by AIBEA (19 July, 2016) shows that total defaults in the 5610 accounts, in various public and private sector banks, add up to Rs. 58,792 crore which is equivalent to 11% of the total NPA in March, 2016.
In the total list of 5610 account, all the names of wilful defaulters are from big corporate houses.
To the utter dismay of the SBI Chairperson, none on the list is a farmer.
Time for self-introspection: who will discipline the discipliner?
Wilful defaulters: No. of accounts and amount
Source: AIBEA, 19th July , 2016
The table shows that SBI which is preaching lessons on credit discipline has the second highest number of wilful defaulters among all Indian banks and the amount contributes to 31% of total amount of wilfully defaulted loans.
Wilful defaulters under SBI and its associates banks: No. of accounts and amount defaulted
Source: AIBEA, 19 July 2016
The worst part is that SBI alone (excluding its associates) has wilfully defaulted loan amounting to Rs. 12,091 crore which is highest compared to any single bank of India.
Data shows that what is being preached in public is not being practised in private.
Loan waiver as source of fiscal problem:
Many commentaries have given new twist to credit indiscipline argument by projecting such steps as fiscally unsound move. According to research by SBI, the loan waiver in UP alone will cost around Rs. 27,419 crore which is approximately 8% of state annual revenue.
Central government has refused to give any fiscal support to the UP government’s prospective decision of farm loan waivers as it violates central government commitment of fiscal consolidation.
Hence, it is argued that such farm loan waivers are fiscally unsustainable and hence should be avoided at all cost. In short government (state or central ) does not have fund to finance it.
But what these commentators miss is that occurrences of such farm loan waiver are very low overtime and the estimated cost (Rs. 27,419 crore) is small compared to the central government’s annual corporate tax revenue forgone for larger and rich corporate houses.
The amount of corporate tax revenue forgone (due to various incentive and exemptions) has increased from Rs. 76,858 crore in 2015-16 to Rs. 83,492 crore in 2016-17.
Such is the extent of large fiscal concession given to the corporates that even Fourteenth Finance commission (pg no.30) has expressed its concern on this issue. To quote the report,
“The various tax concessions and exemptions given by the Union Government reduces the revenue collections and adversely affects the resources accruing to both Union and State Governments. Revenue forgone as estimated by the Union Government reached a peak of 8.1 per cent of GDP in 2008-09 and as a percentage of gross tax revenues, it was the highest (77.3 per cent) in 2009-10. Since 2004-05, revenue foregone has always been in excess of 5 per cent of GDP. In nominal terms, the estimated revenue foregone for 2013-14 (RE) stands at Rs.5,72,923 crore. This accounts for a little over 5 per cent of estimated GDP of 2013-14 and about a half of the total tax collections estimated during the year.”
Hence, the argument that government (especially central) does not have fund to finance the loan waivers which benefits poor and distressed farmers and will act as vital stimulus to agricultural sector does not hold any ground.
Blaming farm loan waivers (which benefits our famers) for credit indiscipline which are sporadic in occurrence and much smaller in size of total bank loans is unfortunate and goes against the basic empirical evidence available.
Giving short term relief in the form of farm loan waiver to farmers, who are facing a prolonged period of acute agrarian crisis at a time of rapidly escalating farm-input costs, increased price volatility and competition, rising inflation and diminishing public investment in supportive rural infrastructure, stands justified. But the invisibility of the harbinger of credit indiscipline, i.e. big corporate houses and rich companies that actually account for a major proportion of bad loans, getting unreasonably favourable deals and write offs, only indicates the beginning of ‘post-truth’ era of banking in India.