The government has extended the repayment date six months under the farm loan waiver scheme, a move that is expected to help banks set aside less money for non-performing loans, but has raised expectations of another loan waiver ahead of general elections.
Under the revised plan, approved by the government last week, farmers will now have to pay the first instalment of their loan in March 2009 against the earlier date of September 2008. P Chidambaram, the then finance minister, had on February 29, 2008, announced a Rs 60,000-crore (Rs 600 bilion) relief package for farmers, the largest in India's fiscal history. This includes a complete waiver of loans to small and marginal farmers and a settlement scheme for other farmers.As part of the plan, farmers who owned 5 acres and more were required to settle 75 per cent of their dues, with the government waiving the remaining 25 per cent or Rs 20,000, whichever was higher.
The first instalment was due September. But farmers pleaded for a reschedule on grounds that the initial deadline clashed with the new crop cycle. After examining the case, the Reserve Bank of India wrote to the government approval to extend repayment of the first installment to March 2009, which was granted last week.
The move is expected to help banks make less provisioning on as much as Rs 32,000 crore (Rs 320 billion) of outstanding debt to nearly 6,000,000 farmers who own more than 5 acres of land.
Prudential rules require banks to declare farm accounts as non-performing if the due aren't paid by the first instalment date. The move would have also made those farmers ineligible for fresh loans in the midst of new crop cycle.
"With August-September being investment season for farmers, banks, fearing defaults, requested the government to increase the repayment tenure so that the account could be updated as a standard asset instead of providing for it," said an executive of the National Bank for Agriculture and Rural Development (Nabard).
The scheme was to be applicable for the loans disbursed from April 1, 1997, to March 31, 2007, and overdue on December 31, 2007, and remaining unpaid until February 29, 2008.
"Under the earlier scheme, along with the payment of the first instalment by September 30, a farmer was required to give an undertaking to repay the last two instalments by June 20, 2009, following which the account would have been upgraded to standard asset. Since the tenure has been extended by six months, all these will continue to be standard assets (and not non-performing assets or sticky loans) till March 31, 2009," Union Bank of India general manager for priority sector and lending division, K Laxman Rao, said.
Union Bank has 82,500 accounts under the debt relief scheme with a total exposure of Rs 900 crore (Rs 9 billion), of which it will receive Rs 225 crore (Rs 2.25 billion) from the government. However, Rao did not give any figures on the non-performing assets if the first instalment date was unchanged.
For Bank of India, the total eligible amount stood at Rs 888 crore (Rs 8.88 billion) with 85,000 accounts. "In case the repayment date for the first instalment stood at September 30, the additional NPA would have been around Rs 110 crore (Rs 1.1 billion), which has now been upgraded to a standard asset till March 31, 2009," said BoI general manager for the priority sector AP Ghugal.
Analysts fear that the extension may fuel speculation of an additional loan waiver ahead of the general elections.
"With state governments announcing subsequent waivers ahead of the general elections, expectation of another waiver is increasing among these farmers and the possibility of default, too, is rising," said an industry analyst.