Forgive and forget

NEW DELHI (Reuters) - India proposes to waive 600 billion rupees of bank loans to farmers, the finance minister said on Friday in his annual budget for the fiscal year that begins in April.

Palaniappan Chidambaram said the write-off would be completed by June 30, with 500 billion rupees going toward farmers holding up to two hectares of land.

For bigger farmers, the budget proposed a waiver of 100 billion rupees as one-time settlement, provided the farmers repaid 75 percent of their loan that was overdue on Dec. 31, 2007.

"All agricultural loans disbursed by scheduled commercial banks... up to March 31, 2007 and overdue as on Dec. 31, 2007, will be covered in the scheme," he said.

Shares in Indian banks initially fell sharply on the announcement, but later trimmed losses as there was uncertainty about how much the government would compensate the banks." (Thanks D.)

This is the classic problem of farm credit. 15 years or so ago I was appointed to the founding board of the National Bank for Agricultural Development. NBAD never saw the light, not because of its horrific acronym, but because the minister of finance wanted it to be private-sector led. There were a couple of bankers on the board and they were not very keen on taking a leadership role. The minister of finance was worried that with a state institution, farmers would defect and that the clientelist state would have to forgive them. I agree with his concerns. We wont have effective state institutions before sectarianism, which is the main source of clientelism, is elliminated.