Vijay Mahajan
Chairman and Managing Director, BASIX

Q: Could you start by giving us your general impressions of the loan waiver?ould we start with your overall impressions of the loan waiver?

A: Well, I think it was not a very wise move on the part of the government although they perhaps did it for political advantage. But in terms of the damage it will do to credit discipline
and expectations of future loan waivers, it is problematic. As a result of this policy, any lender, whether they are in the public or private sector, will factor in the possibility of a future loan wavier, and therefore would like to keep their exposure to farmers limited. So in a sense, the loan waiver will quite perversely lead to a shortage of formal credit rather than solve the problem of farmer indebtedness.

Q: How do you think this will impact the microfinance sector?
A: I don’t think this would make much of a difference to microfinance institutions (MFIs) for two reasons. First, most microfinance institutions in India, especially large ones are following the Grameen Bank Bangladesh (GBB) model, which requires weekly repayments and is targeted at landless households. So by definition, farmers are excluded from microfinance lending because first, they are not landless and second, they cannot make weekly repayments because of their cashflow pattern. BASIX is an unusual MFI in the sense that we do not follow the GBB model and almost 15-20% of our portfolio is to farmers for crop loans and another 25-30% for dairy and other allied activities.
And our repayment schedules are totally different. For crop loans they are twice a year after the harvest and for dairy they are typically monthly – once a month for 18-24 months. But in both cases, be it the MFI following the Grameen model where they are hardly lending to farmers or BASIX where it is lending to farmers, the difference will be marginal because poor people have a lot of common sense, and this is the second reason. They understand the difference between government loans, and a loan waiver given on that, and loans from a friendly, reliable MFI which comes to their doorstep and gives them continuous, timely and adequate credit. And because of those characteristics of MFIs, they want to maintain their relationship with an MFI. So, with the exception of some small pockets where there may be some local politicians who may foment non-repayment, I don’t expect this to make this to make much of a difference.

Q: In the past, through the Integrated Rural Development Program (IRDP), the government has disbursed a lot of subsidized credit to farmers. When microfinance became a mainstream method of providing credit to the poor, some argue that microfinance clients thought microcredit was similar to IRDP loans and therefore negatively influenced credit discipline. How would you respond to such an argument?
A: That is not true. I have known the IRDP since its birth and I have worked on the ground when the IRDP was implemented. The IRDP was not aimed at farmers. The IRDP was aimed at below-poverty-line (BPL) households, most of whom are landless or marginal farmers. And the most common asset that was given under the IRDP was a cow or a buffalo or some asset to start a non-farm enterprise. Most of the corruption in the IRDP took place because of this subsidy. IRDP beneficiaries are well able to distinguish between a government loan and a microfinance loan because of the manner in which it is given, the interest rate, the relationships which are built with an MFI, or the general insistence on repayment. All of these are very different. In fact, in several Indian languages the English word “loan” is used for a bank loan with government subsidies and not meant to be repaid, while the local Indian language word (for example, in Kannada, it is “sala”) is used for a loan from any other source which is meant to be repaid.
So, when you get down to the micro-behavior of a household, they understand this very well. Indeed, remember that there was a loan waiver in 1989 which was one of the government’s responses to IRDP default and microfinance grew as a result of that. After that, and since 1991, banks steeply reduced their lending to the poor. So it is quite the contrary. IRDP did not adversely affect microfinance. IRDP and its failure caused the birth of microfinance.

Q: In the case of the loan waiver in 1989, did it lead to credit shortage?
A: The loan waiver of 1989 caused banks to stop lending to the poor unless a lot of pressure was applied by the government. But within two years, India went in for the reforms in 1991, and the Narasimham Committee urged banks to focus on profitability. So from 1993, they started worrying about non-performing assets (NPAs). Thus there are a number of reasons, other than the loan waiver, that led to credit shortage as can be seen from the RBI data for small loans – there was a monotonic reduction from 1990 to 2004 in small loans as a proportion of total outstanding.

Q: What would you do if you had 60k crores to spend on India’s poor farmers?
A: I would start looking at why agriculture has become a loss making business – a precarious livelihood. There are four sets of issues that surround Indian agriculture today: first, small landholding size; second, low productivity; third, high variance in yield; and fourth, high variance in prices, particularly for small and marginal farmers. These characteristics call for some remediation. Some of it requires policy changes and some of it requires investment. Most of it requires a combination of both. We could have used the 60k crores to enhance the viability of small agriculture through investments in land and water conservation; investments in agricultural research and an extension system which is completely broke – particularly for rain-fed areas; investments in much better crop insurance design – like weather-based insurance; and investments in aggregation and warehousing mechanisms for small and marginal farmers so that they also benefit from the commodity derivative market exchanges. All of these require investments and we could have used the money for that rather than a loan waiver which is not helpful for farmers in the long run.

Q: Your criticisms are echoed by many in the sector. How do we get to the situation where politicians respond to the crisis in the ways you’ve mentioned rather than offering loan waivers? What needs to happen at the national level?
A: I have had the opportunity to speak with some very senior politicians from various parties, and they all acknowledge that neither loan waivers nor reducing interest rates down to even zero percent will make much of a difference. But, I think that part of their understanding is kept aside when it comes to competitive electoral politics. The problem we’ve been observing is that one will say “I’ll waive ten rupees” and another says “I’ll waive twenty rupees then.” You saw the same game in AP with interest rates. First, Mr. Chandrababu Naidu said “I’ll reduce interest rates from 12 to 9%” and then Mr. Rajashekar Reddy said “I’ll reduce it from 9 to 3%” So, one way to handle this is to have a constitutional amendment, which says that government cannot meddle with institutions which take public deposits. However, the government can reserve the right to repay the loans of certain affected categories on their behalf. Repaying the loan on behalf of a distressed farmer is not damaging to the repayment behaviour because then government is reinforcing the norm that loans must be repaid - it’s just that the government has stepped into the shoes of the borrower.

Q: Could you elaborate a bit more on what you mean when you say that there should be a constitutional amendment which prevents politicians from “interfering” in the affairs of deposit taking institutions?
A: If they see that certain borrowers are in distress, government can certainly say “we will repay on your behalf.” They are nobody to say “these loans are waived.” Only a bank’s Board can waive a loan. A loan is a contract between the bank and a borrower.

Q: What kind of political obstacles do you envision to this constitutional amendment?
A: Initially there will be resistance to the idea. But once they realize that, after the amendment, no politician will be able to offer such waivers to take electoral advantage, they will agree to it.

Q: Any other concluding remarks?
A: One of the big problems with the loan waiver is that only about a quarter of farmers anyway get loans from banks, the others don’t. So the vast majority have loans from informal sources. If we had put a rupee limit per farmer of say Rs 20,000 and say that is valid for all types of loans, formal and informal, then it would have been much more equitable. But that is hard to implement because we don’t know how to determine the exact number and amount of an informal loan. So, we should seriously examine some kind of debt swap even for informal sector loans but there is no justification for giving loan waivers of about 20-25k rupees per farmer, all debts added. This will help small farmers much more and, while being equitable, will also be more popular.