Loan waiver: Bankers await the fine print

Bank stocks fell in the wake of the Finance Minister’s announcement but recovered when he clarified that the Government would bear the cost of the loan waiver. According to Mr K. Ramakrishnan, Chairman and Managing Director, Andhra Bank, this move will not hit the profits of banks. “As the money will come from the Government, banks will not lose a single penny. This will benefit banks, as the loans will be off our books. The outstanding that the borrower has to pay will now be paid by the Government,” he said. Mr Ajay Bagga, CEO, Lotus India Asset Management Company, said. “It represents a write off of nearly 4 per cent of outstanding bank loans and 25 per cent of outstanding agricultural credit. Since this money has already been consumed, it will not create any fresh purchasing power immediately, though over time, the principal and interest servicing payments will flow into consumption,” he said. Mr Viren Mehta, Partner, Financial Services, Ernst & Young, said: “The aggregate profits of all scheduled commercial banks in India for FY2005-06 and FY2006-07 was in the range Rs 24,000 crore and Rs 31,000 crore, respectively. Therefore, it should be considered as a foregone conclusion that the Government will provide support for the debt relief. Whether this is in terms of hard cash or some other mechanism and over what period would the support be provided is something that requires clarity.” For the fiscal 2008-09, a provision of Rs 16,000 crore has been made for continuing with the interest subsidy for short-term crop loans. The target for agriculture loans for 2008-09 has been set at Rs 2.8 lakh crore.