The independence was brief. The costs will be big. SBI recanted before a week had passed and withdrew its memo on freezing loans for farm equipment. We all know there?s political pressure on public sector banks, but it was somewhat frightening to know political pressure could be still be made to work so quickly two decades after economic reforms. So, now the politicians who didn?t want their farm loan waiver scheme to be inconvenienced in any way will be happy in the knowledge that no other bank is going to make an attack of irrational banking as SBI did. But smarter politicians among those championing loan waivers know that terrible signals about banking in the farm sector are being transmitted. Earlier loan waivers in the nineties were among the reasons why the share of agriculture in total credit disbursed by the scheduled commercial banks dropped by a fifth, from around 15% in the early nineties to below 12% by 2000-01. And despite best official efforts, the share has gone up a few decimal points by the middle of the current decade. The worst hit has been small farmers, with holdings below 2.5 acres, who, despite their growing numbers, saw their share in the number of loans disbursed by scheduled commercial banks fall sharply since the early nineties. While the number of loans disbursed fell by around 10 percentage points to 38.4%, of total farm loans the value of loans to small holders dropped by more than 6 percentage points to 26.7%.
There are other problems in political banking. Forced lending by scheduled commercial banks at lower rates brings in moral hazard problems as lenders demand bribes. This further forces out the smaller farmer. When corruption is sought to be decreased, what increases is red-tape, as checks and balances?that famous bureaucratic solution?are invented. Little wonder government efforts to direct credit have resulted in adverse selection, given the stated political goals. And surely the government knows that the announcement of its loan waiver has incentivised coolly calculated defaults. With SBI?s decision reversed, the incentive will increase. Just as it did after the earlier waiver, bank credit to farming will be disincentivised. How that will help farmers is a question that?s not to be asked before elections.