Farm Loans

After Farm Loans, Will Govts Waive Off Mudra Loans Next?

Farm_Life_Village_India

A few days back I suggested on Twitter that people with outstanding home loans should organise themselves and ask the government to waive off their loans.

This idea basically came from several state governments waiving off loans given to farmers. It was started by Andhra Pradesh and Telangana, the two states to come out of the erstwhile Andhra Pradesh.

Then it was followed in Uttar Pradesh, where the newly elected government decided to waive off farm loans of around Rs 36,359 crore. It was followed by Maharashtra.

There is a clear trend here. Maharashtra chief minister Devendra Fadnavis recently explained his decision to waive off loans to farm loans by saying: “Neighbouring Telangana and Andhra did it first. It created pressure and then UP announced the waiver. The demand had been there but it became very strong after UP’s decision.”

The idea also came from the fact that banks were busy treating large corporates which had defaulted on their loans, with kids gloves, by restructuring their loans and giving them a longer time to repay. This was basically happening because the corporates owed a large amount of money to banks. And any default would hit them hard.

Now as a home loan borrower, try going to a bank and ask for the postponement of payment of EMI to repay the home loan and see how a bank reacts. Obviously, different kind of borrowers get treated differently.

What has helped the cause of the farmers is that they are numerous in number and the fact that they are organised, which helps them carry out protests at a level so that the government registers it. What has helped the corporates is that their average loan amounts are very large and any default would hit the banks hard.

These factors are missing in case of individuals who have taken on home loans. They are not many in number. They are spread across the length and breadth of India. And they are not organised. In 2013, the number of outstanding home loans stood at 46.43 lakh. I couldn’t find a more recent number. Over and above this, there would be home loans given by housing finance companies, as well.

Typically, the outstanding home loans (in value) are around 60:40 (scheduled commercial banks: housing finance companies). Taking the housing finance companies into account, as well as the fact that the total outstanding home loans may have gone up from where they were in 2013, it is safe to say that the total number of outstanding home loans will be still less than 1 crore.

Also, the individuals who have taken on these home loans would be spread across the length and breadth of the country. Hence, it is difficult for them to get together and protest that the government waive off their home loans, like has been the case with farm loans. The same stands for other kinds of retail loans which have smaller average ticket value, in comparison to the home loan, which is usually the largest loan that an individual ever takes on.

Over and above this, the average loan amount owed by them is very small and that ensures that they are likely to face the full legal wrath of the bank, if they default on their home loans, which is not the case with corporates.

Having said that, there is a precedent of a government waiving off home loans as well. In December 2016, the Telangana government had announced a waiver of home loans of around Rs 3,920 crore to individuals who had benefitted from the housing schemes for economically weaker sections of the society over the years.

So, if individuals with home loans, can get themselves organised they might also be able to get a loan waive off.

But there is one particular kind of borrower, who is in a position to organise himself, protest and ask for a loan waive off.

In 2016-2017 and 2015-2016, the total amount of loans extended under the Pradhan Mantri Mudra Yojana (PMMY or better known as Mudra loans) stood at Rs 3,17,977.81 crore. The total number of borrowers over the two-year period stood at around 7.46 crore. A bulk of these loans have been made to women.

Taking cue from farmers, if these borrowers can manage to organise themselves and protest and demand a waive off of their loans, there is a good chance that they might get it. Assuming that only one individual in one household has got a loan under PMMY, we are looking at 7.46 crore households. At five members per household, we are looking at more than 37 crore individuals, on whom these loans have had some impact. And that is a large vote bank.

If these individuals can get themselves organised they are in a very good position to demand and get a waive off on their PMMY loans. Also, the governments have already set a precedent and will find it very difficult to say no.

This will be especially true for states where elections are scheduled before the Lok Sabha election of 2019. On a totally different note, they might not even need to take it up as an issue, some lazy politician might just do the job for them, by promising a waive off.
And that is the problem with these waive offs. They are unlikely to stop in a hurry.

The column originally appeared on June 19, 2017, on Equitymaster.

 

Modi's first fiscal challenge

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Vivek Kaul

N Chandrababu Naidu, the chief minister of new Andhra Pradesh (what remains of the state after the creation of Telangana), wants to waive off bank loans to farmers and women’s self-help groups amounting to a whopping Rs 54,000 crore. Naidu promised this freebie during the course of the election campaign and now wants to fulfil it.
The trouble of course is that the banks which made these loans will have to be adequately compensated. And for that the newly elected state government will need money, which it does not have. It is estimated that the revenue deficit of Andhra Pradesh will amount to Rs 13,579 crore during the course of this financial year(April 1, 2014 to March 31, 2015). Revenue deficit is the difference between the revenue expenditure and the revenue income of a government.
Hence, the question is where will the government get this money from? Naidu is hoping that the Narendra Modi led government at the centre (BJP fought elections along with Naidu’s Telgu Desam Party both at the state and the national level) will help him fulfil his electoral promises.
But the central government is already stretched on the finance front. In the interim budget presented in February 2014, the fiscal deficit for this financial year was projected to be at Rs 5,28,631 crore or 4.1% of GDP. Even this projection was primarily achieved by cutting down on the asset creating planned expenditure and by not recognising’certain’expenses which in total amounted to more than Rs 1,00,000 crore. Hence, the actual fiscal deficit would have been significantly higher. Fiscal deficit is the difference between what a government spends and what it earns.
If the central government chooses to assist the new Andhra Pradesh government with the entire Rs 54,000 crore that is needed, then it will end up adding to its already high fiscal deficit. In fact, the amount that the new Andhra Pradesh government needs to waive off loans is more or less equal to the assistance that the old Andhra Pradesh received from the central government over the last 10 years(between 2004-2005 and 2013-2014). This assistance amounted to a total of Rs 54,613.4 crore. This comparison clearly tells us the astonishing amount of money that is needed to write off these loans.
One reason that the Modi government might choose to entertain Naidu is the fact that it does not have enough numbers in the Rajya Sabha. But if it entertains Naidu, then it will also have to entertain the likes of Naveen Patnaik and J Jayalalitha, who have been demanding special packages for their states, in return for their support in the Rajya Sabha. And where is all that money going to come from?
Also, it will go against the Modi’s entire electoral pitch of the government creating an enabling environment that allows people to progress, instead of giving out doles to them. It is worth remembering here that the new Andhra Pradesh has around 5% of India’s population. Given that, the question is that whether the central government should be spending such a huge amount of money in a single year on one single state? And the answer is no.
The other option for the new Andhra Pradesh government is to borrow this money by issuing bonds. The trouble is that a state cannot borrow an unlimited amount of money. The borrowing limit for old Andhra Pradesh had been set at Rs 29,000 crore, at the beginning of this financial year. Hence, the borrowing limit for the new Andhra Pradesh will clearly be less than that. Also, as pointed out earlier the state is already expected to run a revenue deficit of Rs 13,579 crore during this financial year.
The moral of the story is that the math for waiving off loans made to farmers and self help groups, does not really work out. News reports suggest that the bankers have requested the ministry of finance to try and convince the new Andhra Pradesh government, not to go ahead with this plan. Other than the math not working out, there are other reasons why the new Andhra Pradesh government shouldn’t be going ahead trying to waive off loans.
First and foremost, it is not fair on the people who have honestly repaid their loans in the past. Also, it will reward those who have defaulted on their loans.
Second, it brings the issue of moral hazard to the core. Economist Alan Blinder in his book After the Music Stopped writes that the “central idea behind moral hazard is that people who are well insured against some risk are less likely to take pains(and incur costs) to avoid it.”
What it means in this context is that after the loans are waived off this time around, people of the state of new Andhra Pradesh, will think twice before repaying their loans, in the days to come. If the government can waive off loans once, why can’t it do it all over again, is a question that the people of Andhra Pradesh will be asking themselves?
Third, in the next election the Telgu Desam and the other parties, will compete to promise even bigger freebies.
Fourth, loans being waived off benefits those people who are in a position to take a bank loan, in the first place. Typically, farmers with large landholdings tend to fall in this category. The small farmer is not in a position to fulfil the requirements that need to fulfilled in order to take a bank loan. Hence, the question is do the large farmers really need to be subsidised?
Fifth, the government of Andhra Pradesh needs to build a new capital over the next years. It will need a lot of money in order to do that. Hence, it makes sense for it to be fiscally responsible during its initial years.
All these reasons suggest that Chandrababu Naidu should reconsider his decision of waiving loans to farmers and self help groups of the New Andhra Pradesh.

The article originally appeared in The Asian Age/Deccan Chronicle dated June 11, 2014.
(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])