Grand Trunk Road

Recently, the State Bank of India announced that it was halting loans to farmers for farm equipment such as tractors and combines. Now, Arun Kumar of the Hindustan Times reports¹:

Stung by protests from farmers, politicians and even a section of its own employees, State Bank of India on Wednesday hurriedly withdrew its controversial decision to suspend financing of farm equipment, primarily tractor loans.

“We regret that our circular dated May 16, 2008, concerning tractor loans has been misunderstood and has given rise to concern. The circular is withdrawn with immediate effect,” SBI Chairman OP Bhatt said in a statement.

What misunderstanding was there? According to Anup Banerjee, an official from the SBI, the halt was intended not for small farmers but for large-scale farmers with huge loans who have fallen behind in payments.

Another angle to this situation is the impact of the farmer debt relief plan being pushed by the government. According to Moneycontrol India², the guidelines for the Farmer Debt Waiver Scheme have been passed and will allocate Rs 71,680 crore ($16.8 billion at current exchange rates) to loan forgiveness. Small farmers are expecting to get 100% forgiveness, whereas large farmers (those with more than Rs 50,000 borrowed) will have up to 25% forgiven.

This loan forgiveness program may be at least partly responsible for SBI’s problems to begin with, though. In The Hindu, C. R. L. Narasimhan comments³ on the harm SBI’s backstepping has done to their image as an independent bank. But also, he notes that:

Already there are indications that even farmers who would have repaid their loans are holding back hoping to get a waiver.

This reminds me somewhat of the subprime mortgage crisis in the USA. Even people who could pay their mortgage have chosen to walk away, hoping for some kind of government bailout. What portion of SBI’s 17.8% default rate on farm equipment is due to this sort of behavior is an open question.

¹ Kumar, Arun. SBI backtracks on farm gear loans. Hindustan Times. May 21, 2008.
² Cabinet okays Farmer Debt Waiver Scheme guidelines. Moneycontrol India. May 24, 2008.
³ Narasimhan, C. R. L. Tales behind SBI’s withdrawn circular. The Hindu. May 26, 2008.