Loan waiver may cost banks Rs 2,000 cr

Seeking data from lenders on overdue loans, the finance ministry has instructed them not to include penal interest, legal, inspection and other charges. Lenders generally impose such charges on loan defaulters to cover their costs. A finance ministry official indicated that banks will write off such charges.

The government expects banks and cooperative societies to bear a little burden as it has decided to reimburse written-off farm loans that are overdue as on December 31, 2007. The government's move will clean the balance sheet of lending institutions, which can redeploy their capital and lend afresh.

"Whatever the banks would have received from unapplied and penal interest, legal and inspection charges would have gone to the profit account. If the amount is written off, it will reduce their profit to that extent. However, lenders are benefiting from recovery of non-performing assets (NPAs)," said a public sector bank official.

A significant part of the NPA recovery will go to the profit account as lenders may have made provisioning for their bad loans. If the government had not taken on the responsibility to repay the lenders, there was little chance that they would have recovered all their overdue loans.

"We are waiting for clear guidelines from the government on treatment of other charges like unapplied interest and penal interest," a senior public sector banker said. The loan waiver scheme, which will be implemented by June 30, is likely to be circulated to banks soon.

The scheme covers farmers (owners, tenants and sharecroppers) cultivating up to 1 hectare and between 1 and 2 hectares of land, irrespective of irrigation facility available. However, the scheme does not cover agricultural loans advanced to companies, registered societies, trusts and partnerships.

In the case of restructured investment loans, the scheme will not cover those installments that have fallen due on the date of restructuring.

However, installments that have subsequently fallen due on December 31, 2007, will be covered.

For bad and recalled loans and for those where suits have been filed, only installments that would have fallen due up to December 31, 2007, will be included.