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Andhra's farm loan recast faces RBI wall

Central bank says data verification shows such relief is unwarranted

BS Reporter  |  Hyderabad 

The Reserve Bank of India (RBI) has told the Andhra Pradesh government there is no case for considering its request for restructuring of agricultural loans in the state.

A letter from RBI to Andhra Pradesh Chief Secretary I Y R Krishna Rao on this arrived on Saturday, even before the state government could prepare answers to a set of clarifications the central bank had sought from it on last year's crop yields.

RBI said it had independently verified crop yields and bank savings patterns during the period the state government said farmers were under stress. The central bank said no parameter justified a loan recast, according to a senior government official who did not wish to be named.

Crop yields should be less than half the normal for banks to consider farm loan relief. RBI said there was no evidence of a fall in crop yields to that level in areas declared as calamity-stricken by the Andhra Pradesh government. This conclusion was based on data generated by state government agencies like the Directorate of Economics and Statistics, according to officials.

"From the earlier communication we got the impression RBI was willing to offer a three-year relief on farm loans. The present letter rules out this possibility," a senior state government official, asking not to be named, told Business Standard.

Since the government was trying to use rescheduled loan payments as a proxy for its promise of farm loan waivers, RBI scrutinised its request in greater detail. Rescheduled farm loans were routinely implemented by banks in the past.

Krishna Rao said he was writing to RBI with crop yield data in justification of the state government's request.

Chief Minister N Chandrababu Naidu is pushing for crop loan restructuring after it became clear his government could not repay loans on behalf of farmers. As pressure mounted on the government to keep its election promise, the state cabinet approved the loan waiver.

Following the cabinet meeting, Naidu announced his government would waive over Rs 40,000 crore of loans at Rs 1.5 lakh per farming family and Rs 1 lakh per self-help group. He said the government would raise the money needed through sale of seized Red Sanders wood, among other means.

Farm loans overdue in Andhra Pradesh are pegged by banks at Rs 87,000 crore. These dues arose after the Telugu Desam Party made loan waiver a manifesto promise in the recently-concluded state elections, according to bankers.

"RBI Governor Raghuram Rajan told us he had spoken to the chief election commissioner on how to prevent political parties from making such promises in future elections," a senior Telangana government official, who was part of a delegation to discuss similar relief for his state's farmers, told Business Standard.

The Telangana Rashtra Samithi had also promised a similar loan waiver, with a cap of Rs 1 lakh for a family. Officials in the Telangana government said they had not received fresh communication from RBI in this regard. This week, the state government is planning to issue orders for the loan waiver. "We will implement the waiver," a finance department official said but refused to elaborate where the money would come from.

  • Tall promises? RBI has criticised Andhra's farm loan waiver promise and asked the state government, for a second time, to show if it has any plan for repayment
  • Long-term recast: The central bank had earlier rejected the state's request for restructuring of loans for a 7-year period but said a maximum of three-year relief could be considered
  • No justification: In its latest letter, RBI has cited data that do not justify the case for agricultural loan recast in the state
  • Recast norm: Crop yields in the calamity areas should be less than half of the actual yield levels for loan recast requests to be considered; but the data do not seem to suggest any such yield shortfall
  • Wilful default? RBI has studied the bank savings of rural households in the state and reached the conclusion that most farmers do not repay loans only because they are promised a waiver

First Published: Tue, July 29 2014. 00:59 IST