GLIMPSES from LIFE & TIMES of BABA BAKHORAN DASS – A LOLLY-POP TO OUR ANNADAATA wrapped as Loan Waiver

The then dispensation in New Delhi understood the importance of Great Nicobar group of Andaman & Nicobar Islands, and planned to use the services of Indian Army personnel after their retirement – as FARMERS. Jai Jawan Jai Kissan slogan was very much in the air. Nearly 200 such jawan hailing from Punjab, Tamil Nadu, Andhra Pradesh, Maharashtra and Uttar Pradesh were given status of settlers. Few acres of leveled land, a plot for construction of dwelling units and some non-refundable monetary support to construct the dwelling units were given and a branch of very recently nationalized commercial Bank was established to cater their banking needs. All decisions were taken sitting in New Delhi without knowing the ground realities.

The branch was advised to extend credit support for a pair of bullock, a pair of milch animal (cows) and crop loans to all. Few lucky could get loan for transport lorry and a power tiller. Distance between Campbell bay (the jetty which liked them from rest of the world) and Portblair was nearly 600 KM. Other inputs like animals, service support etc was available at nearly 1,600 KM away involving travel of nearly a month, whoever was willing to support those brave jawans now settlers.

All were producers, and no one was buyer. Vagaries of nature also played a role, and ultimately almost all loans become NPA (although this word had not seen the light).

BBD was deputed to this great place to handle this unique situation, as a decision was taken in New Delhi that the Government of India will reimburse the Principal amount of such defaulters (those who paid the loan with all miseries and vagaries were forced to find themselves as stupid idiots); and the interest portion will be absorbed by the Bank as it was a nationalized bank. The scene at the branch was so pathetic that the branch was finding it difficult to even find factual position of Principal and Interest forget reconciliation.

PERHAPS THIS WAS FIRST SUCH EXPERIMENT OF FARM LOAN WAIVER BY Government of India.

Ms. Nandini Satpathy of Orissa wanted to experiment first in her state but was not allowed by the Iron Lady, but A.R. Antule in Maharashtra took the risk and earned ire. It may not be out of context to reproduce his feelings as a politician, which he shared latter as Hon’ble M.P in following words, “Sir, you will be surprised to know what though under the scheme it is laid down that for the first two years, nothing need be paid/returned, thereafter within ten years, the amount that is given by way of loan is to be returned in suitable instalments without interest.” But he added: “Within a year these cobblers, artisans and smaller people did repay and the recovery is 95 to 97 per cent within the period when nothing need be repaid. Contrast it with Bank scams. How many thousands of crores were given to the big and the rich and the multimillionaires? How much money has been frittered away and wasted? I do not know what has happened to that? I only heard about Bank scam, a Committee and thereafter some sort of inquiry. But where the matter stands, if at all, at the moment, I do not know. How many thousands of crores have gone down the drain like this? If the same money was paid – poor man does not want more – if you give him one lakh of rupees in his hand, he will be flabbergasted, frightened. He even does not know what to do with it because he has not heard of one lakh of rupees. What he needs is Rs.1500 or Rs.2000 or Rs.2500. Why can this Government not have a scheme?……..”

Incidentally, today the nation is celebrating CHAMPARAN DAY – a political celebration; and MODI THE ECONOMIC DEVELOPER HAS TURNED MODI THE POPULIST.
BBD is busy in exhibiting his wail as a war widow who lost everything.
To conclude the story of Campbellbay, on his return when a note was put up to his immediate boss – an intelligent lady officer of the Bank, borne and brought up educated and served only in Kolkata and New Delhi and had no interaction with any farmer so far – turned down recommendation of BBD as the decision if taken was highly risky.
Now, the issue of Loan waiver to farmers in the light of Chamapran, let us discuss, as the issue has become more political and views of Late Antule as available in proceedings of Parliament is not read by even his own party men. The nature of history is such that whenever exploitation crosses all limits, a few of those exploited begin to raise their voice. Raj Kumar Shukla was part of this endangered species. He jumped into battle but it was beyond his capabilities to take it past the finishing line. Around the same time, at the Lucknow session of the Congress, he met Mohandas Karamchand Gandhi. He convinced Gandhi that he had to visit Champaran at least once to witness the farmers’ oppression first-hand. The barrister accepted his invitation.
On 10 April 1917, when Gandhi alighted at the Motihari railway station, he was unaware that his destiny was about to be transformed. Hundreds of people had converged on the station to meet him. After Natal in South Africa, this was the second occasion when the oppressed were seeing a glimpse of their messiah in this diminutive man. The English collector of Champaran heard about this and predictably got a whiff of a popular uprising. He was arrested on suspicion of disturbing public order. This just fanned the passions further. To ensure that the anger of his supporters doesn’t cross all limits, the district administration gave him a bail proposal. But Gandhi refused to comply and carry out the documentation needed for the bail application. This made him an overnight hero and during the hearing that followed, thousands of people began gathering outside the court room.

A stunned district administration had no option but to release him. Those few hours of detention paved the way for Mohandas Karamchand Gandhi’s transformation into a Mahatma. Gandhi fought this war not with outrage but with tact. He got a survey conducted of 8,000 indigo farmers in 2,841 villages of Champaran.

Presently, television personalities begin holding forth on the mood of a country of 1.25 billion people after speaking to just 500-1,000 people. Just imagine the credibility of such a comprehensive survey conducted 100 years ago.
Still, it may be unfair to perceive the Champaran rebellion as a part of the struggle for Independence. The farmers of Champaran dreamt of freedom from exploitation in 1917.

Has their dream been realized? The bitter truth is that the administrators of Independent India haven’t treated them any better. Even today their farm earnings are not enough to fill their stomach. The indigo tyrants may have gone away, but their place has been taken by moneylenders who are free to suck the blood out of the farmers.
How will we get freedom from them? This question needs an honest answer; before it is too late.
Let us return to Bihar on this day atleast. The initiative of land reforms has not yet borne fruit here. The directives of the judiciary in this regard haven’t proved useful either. Till a few months back, Bihar had a law under which even the Supreme Court’s rulings could be sent for review to the revenue minister. Capitalizing on this, the politicians in the state were sitting over the reforms. This was the condition when parties with a socialist philosophy had been in power in the state for nearly 30 years.
Like Champaran, farmers in other parts of the country are also in a sorry state. Several thousand of farmers commit suicide in India every year. Villages are being deserted owing to lack of employment opportunities. And because of these migrants the infrastructure of the cities is crumbling. But there was some relief on this front last week. The UP government waived the loans of up to Rs1 lakh for close to 8.7 million farmers. The Madras high court has directed the government in Tamil Nadu to waive farm loans. Maharashtra chief minister Devendra Fadnavis has expressed a similar desire. A few other poll-bound states may soon follow suit. It will be nice if, after this populist decision, politicians make some arrangements that ensure that the sons of soil need not get trapped in the quagmire of farm loans again.
This is required because earlier there was just one Champaran and today there are hundreds of Champarans in India. This is Independent India’s tragic gift to Independent India.

But, before that let us go back to some history:

• The historic All India Rural Credit Survey (AIRCS) carried out in 1954 confirmed that formal credit institutions provided less than 9% of rural credit needs in India. Moneylenders, traders and rich landlords accounted for more than 75% of rural credit. Cooperative credit societies had already been in existence for 50 years but their share in rural credit was still less than 5 percent. What is honest present status?
• The 1945 Cooperative Planning Committee had discerned early signs of sickness in India’s cooperative movement, finding that a large number of cooperatives were “saddled with the problem of frozen assets, because of heavy overdues in repayment”. Even so, in the 1950s and 1960s, the way forward was seen to lie in cooperative credit societies. These cooperatives were to take the lead in the Integrated Scheme of Rural Credit suggested by the AIRCS. The share of cooperatives in rural credit did rise to cross 20% in 1971. Today, India’s cooperative credit structure (CCS),with over 15 crore members (including nearly 10 crore borrowers), constitutes one of the largest rural financial systems in the world. The over 1 lakh Primary Agriculture Credit Societies (PACS) can, in many ways, be regarded as the veritable bedrock of India’s rural economy. The CCS has 50 percent more clients than commercial banks and Regional Rural Banks (RRBs) put together. Directly or indirectly, it covers nearly half of India’s total population. The CCS are expected to provide services of farm input distribution, crop production, processing and marketing as also dairying, weaving and textiles. However, the CCS has never realised the enormous potential opened up by its vast outreach. According to the Task Force on Revival of Rural Cooperative Credit Institutions, this owes mainly to a “deep impairment of governance”. While they were originally visualised as member-driven, democratic, self-governing, self-reliant institutions, cooperatives have over the years, constantly looked up to the state for several basic functions. The Task Force describes in detail how state governments have become the dominant shareholders, managers, regulators, supervisors and auditors of the CCS. The concept of mutuality (with savings and credit functions going together), that provided strength to cooperatives all over the world, has been missing in India. This “borrower driven” system is beset with conflict of interest and has led to regulatory arbitrage, recurrent losses, deposit erosion, poor portfolio quality and a loss of competitive edge for the cooperatives. Domination by richer elements in the rural elite that characterised cooperatives in the colonial period continues to be an abiding feature of these institutions even after independence.
• In 1951, the AIRCS found that the share of banks in rural credit was less than 1 percent.
• Even through the 1950s and 1960s, the role of private commercial banks in rural credit remained minimal and indirect. The AIRCS itself had wanted involvement of these banks in agricultural marketing and processing but not directly in farm output. Rural branches of commercial banks were few and far between despite a 1954 RBI directive for them to open at least one branch in unbanked rural and semi-rural areas for every branch opened in previously banked areas. The Imperial Bank of India was nationalised in 1955 and the new State Bank of India was asked to open 400 branches in semi-urban areas and start agricultural lending, even if at a loss. Now, even SBI has taken its subsidiaries in their fold.
• Even so right up to 1971, the share of banks in rural credit was no more than 2.4 percent and most of these loans were made to plantations. Their main activity was to finance agro-processing firms and purchase of bonds floated by land development banks. Until the end of the 1960s, the overwhelming share in commercial bank credit was that of industry (62 percent) and trade and commerce (26 percent). Within industry, the distribution of credit was skewed in favour of large borrowers It has also been alleged that “advances by private banks were diverted to sister companies of the banks or to companies in which their directors had an interest”
• Thus, cooperatives remained dominated by the rural elite and banks continued to have an urban bias throughout the twenty years after independence.
• Indian banks in the colonial period ignored rural credit and specialised in short-term credit for trade against conventional collateral.
• Set up in 1921 by merging the Presidency Banks of Bombay, Bengal and Madras.
• In 1959, eight major state associated banks were made subsidiaries of the SBI. (Since now merged).
• A similar phenomenon was observed by Keynes in the British context in the 1920s decades after the First World War. Similar state-led rural finance programmes spread across the developing world in the post-colonial period. State control over banking to act as an engine of structural change and the attack on poverty was part of the orthodoxy of development economics at that time.
• Even though they lament it, assemble data on government ownership of banks around the world, which show that such ownership is large and pervasive. In the average country, more than 40 percent of the equity of 10 largest banks remained in government hands even as recently as 1995.
• Theoretical Case in Development Economics Perhaps the first intellectual case for nationalisation of commercial banks in India was made in a public lecture delivered by KN Raj in 1965. Raj felt “there are important reasons why banking enterprises seeking to maximise their profits would not venture out into areas and sectors of activity to which high priority needs to be attached from a larger social and economic point of view”.
• Thus, rural credit was not merely a commodity that needed to reach the poor to free them from usurious money lenders; it could also be seen as a public good critical to the development of a backward agrarian economy like India. Especially as Indian agriculture moved decisively into the Green Revolution phase, where private investments by richer farmers needed massive credit support. Private Banks operating in an imperfect credit market would only aggravate already existing imperfections. As some economist has put it, “the most important prerequisite for becoming an entrepreneur is the ownership of capital . . . firms below a certain size have no access whatever to the capital market . . . a state of business democracy where anybody endowed with entrepreneurial ability can obtain capital for starting a business venture is, to put it mildly, unrealistic”.
• In the General Theory, economist have expressed that the problem may be examined a little differently. Distinction between “two types of risk that affect the volume of investment”. The borrower’s risk arises because he is unsure whether his business venture will provide the expected yield. He would want a low rate of interest, which is but natural. Even in the United States, the Community Reinvestment Act, 1977 entails that banks meet credit needs of low-income neighbourhoods especially if the venture is a risky one. But the same situation creates the “lender’s risk” of default by the borrower (voluntary, terms “moral hazard” or involuntary, due to poor returns on investment). This necessitates that the lender charges a rate of interest high enough to induce him to lend. Bankers express the resulting social dilemma somewhat poetically: “the hope of a very favourable outcome, which may balance the risk in the mind of the borrower, is not available to solace the lender”.
• Applying the insights of Bankers to a deeply unequal agrarian economy like India, it is argued “the very basis of profit-making in banking activity sets limits in underdeveloped economies to the enterprise it can display” There are high information and transaction costs of dealing with many small borrowers that acts as a major disincentive.
• Also because profitability of banks is greater, the higher “the proportion of their earning assets to the idle cash reserves they have to hold” servicing illiterate customers, who insist on payments in cash on the spot, means higher idle cash reserves of banks and lower profitability.
• Nationalisation of large banks was the only forward. Bankers were aware that “the bureaucratic element in decision making may introduce considerable rigidity” but in “large private banks the element of impersonality, with all the rigidity it introduces, is almost as great as in the case of State-owned banks, except in case of favoured customers known to the bank. . .The larger private banks are no less impervious to the needs of small customers who have no security to offer”
• The 1969 law sought to dramatically change course. After nationalisation, branch expansion was deliberately skewed towards previously unbanked or under-banked rural and semi-urban areas. Reaching out to Unbanked Areas The RBI created a comprehensive list of unbanked locations in India that it circulated every few years to all banks.
• In 1970, the RBI formulated its first “socially coercive” licensing criterion based on this data. For every new branch in an already banked area (with one or more branches), each bank would have to open at least 3 branches in unbanked rural or semi-urban areas.17 The RBI directed that all semi-urban locations would 14 There was a stated thrust towards reducing income inequalities and the concentration of economic power in a few hands. Prime Minister Indira Gandhi unleashed a package of socialist policy initiatives, including the abolition of privy purses, culminating in the winning Garibi Hatao campaign of the 1971 elections. The RBI was set up in 1935 and nationalised in 1949 16 647 banks failed between 1937 and 1947. RBI intervention brought this down to 242 between 1947 and1951.

Now, having examined history, records, statistics, experiences of global meltdown, banking reform, technology and so many other changes, let us find some vision for future. Let us be realistic, because bad economics with populist politics will ruin the NATION. Giveaways can come only ON THE COST OF DEVELOPMENT. Surprisingly after thrashing Congress-style populism in the polls, NaMo is has taken that very failed strategy. Such steps corrupt the minds of all its stakeholders. NaMo had promised rapid economic development and good governance, not loan waivers. He said sorry to Chandrababu Naidu. Earlier Shri I G Patel had said sorry to Shri Antule, now Urjit Patel says same thing. And both were right as RBI Governor. It erodes loan discipline and encourages wilfull defaulters. Those who repay look like fools and those that renege on loans are rewarded handsomely. The huge NPAs of the banking system has already threaten macroeconomic stability and future economic growth. Encouraging a climate of default at this stage is highly irresponsible. Let us find answers of following questions:

o Why benefit only those who have borrowed and not others who did not?
o Why benefit only defaulters and not those who repaid their loans despite many difficulties?
o Why only farmers? What about landless labors, artisans, weavers?
o What has happened to Education Loan NPAs?
o What is the status of investments in infrastructure ventures?

Will it not be more prudent that the government should step us infrastructure spending, as shown by Nitish Kumar in Bihar?

Just for lighter moment – whether politicians, and aam aadmi at R K Nagar constituency have inadvertently exhibited jointly and severally that HUM KO TO YE PASAND HAI…

Author: mahesh3006

A retired development banker with strong bias towards rural development through microcredit