Fearing delayed reimbursement, banks wary of using own capital

Learning a lesson from the farm loan waiver scheme in 2008, wherein the banks had to wait for three years before they were given back their capital used for the debt write-off, the public sector and private lenders are treading cautiously this time.
The Maharashtra government, which is implementing the ambitious Rs 34,022 crore farm loan waiver scheme, recently asked the banks to use their own funds to settle farmers' loans and promised them a reimbursement "as soon as possible". However, the banks say that it would be hard for them to sustain until they get back their money.
A nationwide farm loan waiver had been announced during the UPA regime in 2008.

A senior official from a public sector bank said, "Such disposable capital is available only with the public and private sector banks, but the biggest share in crop and term loan given to farmers comes from cooperative banks. The cooperative banks are cash-strapped."
When asked about the concerns expressed by the banks in using their own capital for loan waiver implementation, the official said, "Similar method was used in 2008 where the Centre and RBI were involved in loan waiver decision. All the banks in the country operate as per the RBI guidelines, hence banks followed the route and used their own capital to settle the outstanding loan claims. But, the UPA government took three years to reimburse the amount to the banks. Therefore, we are more cautious this time."

In case of the Maharashtra government's loan waiver scheme, the only guarantee of reimbursement is the state government itself. There is no assurance from the RBI or union government. In fact, Union Finance Minister Arun Jaitely on June 12 had already clarified that states would have to bear the farm loan waivers from their own coffers, the officer pointed out.

"When we asked this question of how the state government plans to reimburse the amount, we did not get any concrete answer from the government. Even the (government's) letter shot on October 13, asking the banks to use their own capital, had also used the words 'as soon as possible' for reimbursement from state to the banks," another officer of a private sector bank.

An official of Maharashtra State Cooperative Bank, the apex bank of all the cooperative banks in the state said, "We have been already treated with suspicion in the last three years, because cooperative sector is largely in the rural areas and we are always considered inclined towards the Congress (party)."
"The deposits with cooperative banks are used for issuing loans. If we use it for the loan waiver and the state government repays it after 3-4 months, we will not have any income during that period. How can we support it?" he asked.