Loan Waiver is not the solution- Know why? - Seeker's Thoughts

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Saturday, 26 January 2019

Loan Waiver is not the solution- Know why?



Since 2006, when infrastructure projects finished on time, there was an economic boom, that means higher state of economy. That time loan waiving was possible, but when budget is already tight, and no benefit comes out the loan waving, there is need to rethink this concept

The loan waiver is both bad economics and bad politics, as small and marginal farmers primarily do not go to the bank but ask for money from a money lender. Loan waiver is not going to make any sense for them.  MUDRA loads and Kisan Credit card are further potential risk to the health of already suffering banking system. New elected governments often offer a 'loan waiver' for getting votes. This breaks the system's backbone and has long lasting impacts. To provide a solution, first one needs to understand the problem. 
What are the problems for farmers?
Problems faced by farmers are- Periodic bad loan and Poor rainfall, non availability of a market to sell at proper price, and lack of facilities. Therefore credit availability is important for the farmers, but so it the credit discipline for bank’s health. 

As shown in the picture, the problems are no where leading to a solution of Loan Waiver. 
Why loan waiver is not a solution?
Laon waiver are poorly targeted, and this vitiates ‘The credit culture’  and stress the budget of the respective governments.  Due to vote bank politics, politicians try to attract the citizens, and as farmers hold a remarkable amount of the population, politicians often announce loan waiver. 
Loan waiver, hampers the health of financial institutions, and does not even reach to the beneficiary.  For example, even if Maharashtra government announced the load waiver, yet the farmer suicide rate remains prevalent in the state. The practicality of loan waiver has not been productive. 

What banks have to go through?
Banks are key component in financial system, as they give loans to business, houses and that money is used in productive works, and the cycle of money remains perfect.
However, there has been a huge problem of NPA, which can be converted into national crisis. The reason is going to be irrational exuberance.  

A way ahead
This time, attention should be two ways,- Bank’s Health , and Farmer’s help.
Banks should not be pressurized to lend money in MUDRA yojana, and KISAN Credit as warned by the former RBI governor Raghuram Rajan.  Public Sector banks are going through a lot of frauds, and NPAs.
Banks are controlled and not able to make commercial decisions without inquiry.  Hence more power should be given to the banks.  
There are more modification needed for the Bankruptcy code, that it becomes more effective, transparent . However, out of the court settlement should be preferred first and later on the Bankruptcy Court should come into the picture. 
High level of empowered group should be organized for cleaning up the banks. 
Much more study and tracing on the rise of NPA should be considered. 
Politicians should come to an agreement collectively that loan waiving should not be used as election agenda. 
Farmers should be given utmost priority, but a sensible solution should be given to them like building an appropriate infrastructure for farmers to get irrigation, proving a suitable market for them, and targeting on the small and marginal farmers to give proper attention.