The conventional wisdom on Union finance minister P. Chidambaram’s Rs 60,000 farm loan write-off has been that public sector banks will have to take the “hit”. But BFL-mPhasis founder Jaithirth Rao, who was the youngest Citibank head when he set up operations in India, writes in The Indian Express:
“The real beneficiaries of this supremely pro-farmer move, one could argue, are not the farmers but the banks. Here they are saddled with loans that they could not collect anyway, and in place of these ‘non-performing’ assets (bankers love euphemisms) the banks will receive securities where the principal and the interest are fully guaranteed by the Sovereign Secular Socialist Republic of India. Bankers must be happy and with good reason.
“In the past, when rich businessmen who were friends (cronies?) of politicians could not or would not repay their loans, elaborate rituals like ‘restructuring’ and ‘references to BIFR’ were the order of the day. As the old saying goes, if you borrow a thousand rupees and default, the bank troubles you. If you borrow a million rupees and default, you trouble the bank. Since loans to individual farmers were small, by definition the banks troubled them and as there was no magical BIFR, loans stubbornly remained on stressed balance sheets. Now that worry is gone at one stroke.”
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