Union Finance Minister P. Chidambaram is trying to soothe the frayed nerves of the banking sector by assuring that the $15 billion loan waiver package for poor and marginal farmers, announced as a budgetary policy on Feb.29, would not hurt the banking system but rather strengthen it.

Speaking to the reporters following a meeting with the board of Reserve Bank of India (RBI), March 6, Chidamabaram said that the central bank has promised the government that it would support in implementing the scheme.

The RBI governor has told the board that the RBI is fully geared to support the government in implementing the scheme in a manner that the banking sector will be strengthened, not weakened. The banking sector will be compensated in a way that the banks will not be constrained at all, Chidambaram said.

Modalities of the scheme are being worked out, the finance minister said, adding that steps would be taken to ensure that the farm loan waiver scheme helps farmers, improves credit flow and serves the interests of the banking system.

The scheme would be funded through government revenues, Chidambaram said, adding that the government, the RBI and the public sector banks would work together to implement the scheme.

Farmers have been working for people from time immemorial, especially after 1947. We are all indebted to them, he said.

By writing off farm debts, we have made their slate clean. They can start new accounts with banks and borrow money, not seeking loans from usurers at exorbitant rates of interest, he added.

The RBI has written to banks seeking details of farms loans given before March 31, 2007 and which had outstanding dues as on February 29, 2008. Banks are expected to file in these details by March 14, 2008.

The debt-relief package is expected to apply to farm loans made by many state-owned banks up to March 31, 2007, and overdue on December 31. Farmers with up to 2 hectares of land would be eligible for a complete write-off of loans overdue on December 31, 2007, and which remained unpaid up to February 29.

Every year, burdened by huge debts and poor crop, hundreds of farmers in India either quit farming or take the more desperate step of committing suicide.

RBI India