Stories behind SBI’s withdrawn circular

The fact that the country’s largest bank was forced to withdraw an innocuous internal circular on farm loans only indicates the inability of even well run banks to take independent decisions.

An internal circular issued early last week by State Bank of India to its branches advising restraint on lending for purchase of tractors and farm equipment became a major controversial issue.

The intended benefit to the bank was, of course, recovery of some loans that had become sticky. In the sub-category of advances for buying tractors and farm equipment, SBI has a large share of problem loans.

Taken out of context, the paragraph dealing with a freeze on such loans was construed as ‘anti agriculture’. Not just the farmers’ lobby but the equipment manufacturers and inevitably the political parties as well criticised the SBI’s alleged anti-farmer stance.

Goodwill negated

If the UPA government had earned some goodwill from the farming community through the Rs. 60,000-crore loan waiver scheme, the action of the country’s biggest bank, it is alleged, had negated the advantage through just one circular instruction. For SBI, there was no option but to withdraw the circular in full.

There can be no better demonstration of the misunderstanding over the banks’ role in agriculture finance and indeed in all other traditional and non-traditional commercial bank functions than was seen last week. In fact, there are larger messages that emanate from this controversy.

Proxy for government

The first has to do with the autonomy of public sector banks. Much of the criticism was directed not just at SBI but at the UPA government itself. SBI or for that matter any of the other large public sector banks acting as a proxy for the government is not new.

Autonomy for these banks has been a mirage. The Finance Minister has on more than one occasion ‘talked’ to the PSB chairmen into lowering interest rates even when the RBI’s monetary policy stance has been anti-inflationary and hence favoured higher interest rates.

Political compulsions

Second, agriculture has been a sensitive issue. The loan waiver scheme announced in the budget sought to make political capital for the ruling alliance. Considering the magnitude of the waiver and the fact that what was being waived was not some government dues but loans provided by banks to farmers from out of their resources, there was hardly any worthwhile criticism of the scheme as such. (The one area of confusion regarding the source of funds for the waiver was subsequently cleared .The budget would provide the funds.)

Three, the above is clearly the outcome of a belief that government owned banks are an extension of the government and that they exist only to carry out their owners’ bidding. The conclusion is inescapable that in popular perception, public sector banks are like the electricity boards dispensing free power to some classes of consumers and are generally adopting practices that run contrary to accepted commercial principles.

Four, those who say that the farm loan waiver scheme is a socially relevant one and that it does not matter if commercial banking principles and practices are given a go by for the sake of larger goals miss one obvious point.

An avoidable lapse

Already there are indications that even farmers who would have repaid their loans are holding back hoping to get a waiver. It is also likely that banks will slow down their lending to agriculture, especially for financing tractors and equipment. These are medium term loans and the risks of political interference here are higher than in short-term crop loans.

Five, there is obviously an urgent need to spruce up the public relations machinery of the PSBs. SBI’s back tracking over the tractor loan circular was not unexpected. But surely it could have made a much better job of communicating the original intentions.

The circular, as pointed out, is by no means anti- farmer. Many other public sector bank chiefs who were interviewed claimed that they have no problems with tractor loans. Clearly such statements are for the consumption of their political masters.

Six, the biggest loser in such futile exercises is the reform process. The Finance Minister and other policy makers probably do not get the vital feedback from the banks.

On the premise that the higher ups will not like inconvenient news, it is far easier to paint a positive picture than even try to highlight some negative factors.