A review of #NLHafta from Ankur Poddar

Dear Newslaundry Team,

This is Ankur Poddar from Mumbai and I am a subscriber. I am writing this short mail in response to the discussion on Farm Loan waivers in Hafta 124. Obviously it does not make any economic sense. But let us keep macroeconomics aside and think from the perspective of a distressed farmer. I know Anand Ranganathan Sir had said that comparing corporate loan write-offs and farm loan waivers is like comparing apples and oranges, but that is exactly what I am going to do. Give me a chance to explain my logic (and I am going to argue purely from the view of a farmer).

On one of the usually nonsensical TV debates I heard one of the Congress spokesperson arguing that if 4 Lac Crores worth of Telecom Sector debt can be provided for (read written off) by banks then why can’t the Govt write off the entire 3.5 Lac Crores of farmer loans (I have not verified either of these numbers). As I said, it doesn’t make any economic sense to do this but here goes my argument.

What differentiates a corporate loan from a farm loan? One of the key features is that the owners of defaulting companies are not personally liable to repay them due to the corporate veil, which can only be pierced under exceptional circumstance. Now you guys must have followed the entire coverage surrounding the Asset Quality review by RBI, and how Mr. Rajan was praised highly for taking the tough step of forcing banks to provide for bad / near bad loans. This was seen as an important step in cleaning up the Balance Sheet of these banks, hence paving the way for heightened lending activity, which would eventually lead to Economic Growth. If you decode this in simple terms, it basically implies that Banks should write off these loans, take them off the Balance Sheet, infuse more capital to make up for these losses and then lend again in order to help companies invest and grow. At the most basic level, it is equivalent to a corporate loan waiver (obviously selectively). In some cases, lets say RCom, the owners (leaving aside the minority shareholders) are super rich guys, like Mr. Ambani or Mr. Mallya, who do have the means to pay back the loan, but they are hiding behind the Corporate veil (and rightly so), not paying out of their personal wealth.

Let’s compare this to the situation of a farmer. Just because their is no corporate veil to protect him (and partly also because presumably he has better ethics), banks are after his life to pay back loans, which he may not be able to repay genuinely due to economic situation. What does he do? Either he gets into the vicious cycle of a debt trap, or he commits suicide. Now, imagine the same farmer forming a company (either individually, with his family members as dummy shareholders, or jointly with other farmers). In this case, he is behind the corporate veil, and under poor circumstances, he can happily not repay the loans. When many of these loans would get aggregated, RBI would do an Asset Quality Review and force banks to write off these loans, take them off the Balance Sheet, infuse more capital to make up for these losses and then lend again in order to help farmer companies invest and grow, instead of advising the Govt against loan waivers.

Forget about the economic implications for the country for once. From the farmer’s standpoint, doesn’t the current situation seem unfair? Especially since Vijay Mallya has been made the poster child of crony capitalism. If farmers were educated enough, wouldn’t corporatization be a very enticing option? I know i am completely ignoring the fact that for a corporate loan, there needs to be a strong business case, which farmers with small holdings may not be able to produce. But then, aren’t many of the corporate loans with poor business case given on the basis of phone calls?

Would love to hear your views on this.

P.S. I realize that while I intended this to be a brief mail, but ranting is always very entertaining, and its difficult to keep a check, so my rant has gone on for 678 words.

Regards,
Ankur Poddar