Loan waiver Trouble in the banking system
One of the high-sounding rhetorics of this year’s budget has been the waiver on small loans amounting up to Rs 30,000 owed to government banks, chiefly the Agriculture Development Bank of Nepal (ADBN), the Rastriya Banijya Bank (RBB) and the Nepal Bank Limited (NBL). The interest on loans up to Rs. 100,000 has also been waived. This, in fact, has been a Maoist agenda since the insurgency days. They had launched a campaign of destroying bank credit records. Most honest borrowers defied the Maoist diktat and continued servicing the bank loans.
There are, of course, thousands of genuine borrowers who have been victims of conflict, including the internally displaced. Such households need government support. It was the declared policy of previous government to provide merit-based relief in such cases. This year’s budget has also made provisions for “those below the poverty line” and “victims of conflict and natural calamities”. But because of the absence of an up-to-date database and an institutional mechanism to identify such cases, the scheme is certain to invite complications.
Informal sources account for bulk of rural credit. Access to institutional credit is not easy for poor people. Because of easy access and lack of hassles, poor people prefer informal sources despite high interest. In that sense access to institutional credit remains a privilege for Nepal’s rural poor. In recent years, micro-credit institutions have proliferated as they represent the prime source of small loans. These institutions include government-supported Gramin Bikas Banks and other such institutions promoted in the non government sector. The size of their loans varies from Rs 10,000 to Rs 40,000. This new development has reduced the flow of small borrowers to ADBN, RBB and NBL.
Furthermore, these institutions closed most of their rural branches during the conflict period. The only institution which is still active is the Small Farmers Development Bank (SFDB), an ADBN subsidiary. In other words, the government relief will cover only a tiny fraction of small loans.
What is more interesting is that the Finance Minister has not allocated necessary budget even for this small relief. Of the estimated liability of Rs. 918 crores on this account, he has allocated only Rs. 40 crore this year and transferred Rs. 878 crores to future governments. By transferring burden to future taxpayers to fulfil its populist agenda, the transitional government has defied moral and ethical norms.
Problems are surfacing in banking system. SFDB’s borrowers have stopped repayment. Liquidity has dried up and the bank is not in a position to issue new loans. Meanwhile, more borrowers are thronging to the banks. This might also be because they think loans may eventually be waived. Due to liquidity crunch even genuine borrowers will not get new loans. Other micro-credit institutions could face similar problems. Their clients will feel that if government provides loan waiver to borrowers from other government banks why should only they be discriminated against?
Even in the face of Maoist diktat in the countryside, repayment ratio of small loans has been very good. The recovery ratio in the ADBN was 76% and that of its subsidiary more than 90% this year. With respect to Gramin Bikas Banks it has been more than 95%. But the Maoists are penalising honest people and rewarding those who deliberately defaulted. Some borrowers — victims of conflict and naturally disasters — who could not repay naturally would need government relief. But the FM’s sweeping announcement will encourage even honest borrowers to take the wrong path. A similar scheme in Bangladesh had to be dropped in the face of stiff opposition from Mohammed Younis, the Nobel laureate and the father of Gramin Bank. He argued that such waivers would destroy loan recovery and banking.
The FM cannot have the cake and eat it too. It is unethical to fulfil his party agenda by adding burden to future governments and taxpayers. A genuine loan relief should encompass not just government banks but also other institutional sources including micro-credit institutions. Also, the relief should not discriminate against honest borrowers who repaid in the past; they must be compensated. The loan waiver scheme is complicated. A genuine loan relief must be broader in scope and preceded by much thought and homework. The ad hoc manner in which it has been proposed will invite trouble in the banking system.
The symptoms of malaise are already visible — declining recovery and liquidity crunch when borrowers are knocking bank doors. Breaking down of institutional credit and people resorting to traditional money lenders have become distinct possibilities. It may adversely affect the financial sector reform programme and the Asian Development Bank’s assistance to reform the ADB/N’s financial health. But, the question is: Do the Maoists care?
Dr Mahat is ex-finance minister