Restructure crop loans, banks told

Restructure crop loans, banks told - The Hindu var _comscore = _comscore || [];_comscore.push({ c1: "2", c2: "11398210" });(function() {var s = document.createElement("script"), el = document.getElementsByTagName("script")[0]; s.async = true;s.src = (document.location.protocol == "https:" ? "https://sb" : "http://b") + ".scorecardresearch.com/beacon.js";el.parentNode.insertBefore(s, el);})(); Follow Today's Paper Archive Subscriptions RSS Feeds Site Map ePaperMobileApps Social SEARCHHome News Opinion Business Sport S & T Features Books In-depth Jobs Classifieds Shopping Bus tickets National Andhra Pradesh Karnataka Kerala Tamil Nadu Other States National» Other StatesBHUBANESAR, October 29, 2013 Updated: October 29, 2013 14:30 IST
Restructure crop loans, banks told Staff ReporterShare  ·   Comment  ·  print  ·   TweetTOPICS Orissa Bhubaneswar
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After cyclone and floods damaged crop fields in the State, the State government on Monday moved to restructure and re-phase crop loans.

At a hurriedly convened meeting of State Level Bankers’ Committee, Additional Chief Secretary and Finance Secretary U. N. Behera asked bankers to consider converting short-term loan into medium term loan at 2 per cent per annum for farmers. This would enable the farmers to utilise fresh crop loan in view of recent cyclone and flood, Mr. Behera said.

All banks including commercial banks, regional rural banks and co-operative banks were advised to restructure and re-phase the existing loans in affected areas as per RBI guidelines. Besides, banks were urged to give importance to fresh loan to victims for resumption of normal business.

Focusing on rabi crop loan finance, Mr. Behera called upon all banks to achieve the annual target of crop loan and term loan of agriculture, including allied sector, positively.

Banks were also asked to implement RBI guidelines with regard to rehabilitation package in respect of micro, small and medium enterprises (MSMEs).

The State Level Bankers’ Committee resolved to expedite the credit delivery to affected people by organising special camps by the line departments of the government in coordination with the banks. All banks were advised to issue necessary instructions to the branch-level functionaries for implementation of action plans that emerged at the meeting.

It was also decided to hold monthly review meeting at the State level as well as district level for close monitoring of progress of implementation of relief and tehabilitation measures to be undertaken.

Despite the emphasis laid on crop loan, commercial banks and other public sector banks have failed to achieve targeted disbursement of agricultural loan in the State.

The State had set a target disbursement of crop loan of Rs. 13832.31 crore from 41 scheduled banks. However, after kharif season, banks had disbursed only Rs. 5226.12 crore registering an achievement of 37.78 per cent.

The achievement of public sector banks in crop loan was 24.45 per cent, private sector banks (18.36 per cent), two regional rural banks (27.08 per cent), commercial banks (25.26 per cent) and cooperative banks (48.42 per cent).

Taking exceptions to dismal rate of agriculture loan disbursement by banks during kharif season, the government had even threatened to drop several banks from the list of banks eligible for investment of government and public sector fund. This flood had damaged 1.98 lakh hectares of crop area.

Keywords: crop loans, MSMEs, cooperative banks, rural banks, agriculture loan

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Examine Budget Proposals' Impact on Student Loans

Proposed House legislation would limit the maximum Pell Grant award to $5,645 for the next 10 years.

Back in April, we took a look at the president's budget proposal and what it might mean for postsecondary education. The House and the Senate have also released vastly different fiscal year 2014 budget resolutions.

Just like the president's proposed budget, congressional budget resolutions are not law. But they do show Congress' priorities and serve as self-imposed taxing and spending guidelines.

The most important benchmarks established by the budget resolutions are the overall appropriations funding levels they set. The total amount of funding will determine in turn how much every committee – including the Senate Health, Education, Labor and Pensions Committee and the House Education and the Workforce Committee – can spend and therefore if specific programs can be increased or if they will either be cut back or eliminated entirely.

[Learn the perks, pitfalls of student loan repayment proposals.]

This is also one of the biggest differences between the House and Senate proposals. The House's budget resolution sets an appropriations limit of $966.4 billion. That's about $18 billion less than the fiscal year 2013 postsequester funding and $477 billion less than the presequester funding.

In addition – as the New America Foundation points out in its Federal Education Budget Update – the House intends to divert money from nondefense to defense programs. This will further reduce the amount available for education programs.

The Senate, in contrast, sets a nearly $1.1 trillion appropriations limit. This amount of spending would require the budget passed by Congress to amend the Budget Control Act – known also as the sequester – in order to exceed the limits it sets. It's also about $92 billion more than the House wants to spend. That's a large gap to bridge.

It is clear Congress is also deeply divided in the policy realm as well. The House, led by Rep. Paul Ryan, R-Wisc., has produced what it calls The Path To Prosperity: A Responsible Balanced Budget that aims to balance the budget in 10 years. According to the resolution, a key problem with education funding is that federal student aid – led by Pell Grants – is driving up tuition costs and results in graduates having to make large student loan repayments.

[Understand efforts to stop the student loan interest rate increase.]

Many of the policy responses outlined in the House bill are devoted to cutting costs, including limiting the maximum Pell Grant award to $5,645 for the next 10 years, rolling back changes made in the College Cost Reduction and Access Act of 2007 that broadened the eligibility of needy families for student aid and moving to fair-value accounting for student loans. The resolution also implies it would be good to reinstate the wasteful Federal Family Education Loan program.

The Senate budget resolution produced by Sen. Patty Murray, D-Wash., – which sports the equally anodyne title of Foundation For Growth: Restoring the Promise of American Opportunity – also identifies the increased cost of college as a key problem, and "assumes Congress will enact proposals to reduce college costs while expanding college access and completion."

However, it calls for increasing the nation's investment in education and proposes solutions that are almost diametrically opposed to those in House budget resolution.

[Get tips on student loan repayment for college dropouts.]

Specifically, the resolution implies the Senate would expand Pell Grants and lauds the ending of the FFEL program. It also proposes getting rid of the student loan fee increases that were created by sequestration, retaining subsidized loans that help needy families and ensuring student loan interest rates are affordable.

It's possible the House and Senate will bridge these and other gaps and produce a joint budget resolution – perhaps though the budget reconciliation process – but it seems highly unlikely. Instead, those interested in the education budget have to wait out the larger budget battle that will be waged this summer to see if our nation will invest, or divest, in postsecondary education.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.

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How the Government Calculates the Cost of Student Loans

Analysts disagree over the method used to calculate student loan profits and costs.

A couple of weeks ago, the Student Loan Ranger detailed some of the proposals Congress is pondering to provide short- and long-term fixes to the imminent doubling of interest rates on subsidized federal direct loans. Part of that debate is data released last month by the Congressional Budget Office that shows a fiscal year 2013 "profit" of $50.6 billion for the Department of Education.

But it's not as simple as finding a fair way to help students by lowering interest rates. Some analysts argue that the government is using an inaccurate accounting method that vastly overestimates the amount the government will make both in the coming fiscal year and beyond.

[Learn more in our College Loan Center.]

In fact, they argue, the government will lose money in the long run so it should keep interest rates the same or even raise them. As this Congressional Budget Office publication explains, the current estimates that show a government profit are based on principles established by the Federal Credit Reform Act of 1990.

The publication states first "the cost of a student loan is recorded in the federal budget during the year the loan is disbursed, taking into account the amount of the loan, expected payments to the government over the life of the loan and other cash flows." Items like the probability of default and the recovery rate are accounted for in this part of the equation.

Next, a discount rate is subtracted. A discount rate allows a calculation of gain or loss in today's dollars by taking into account market risk and the idea that money available now is worth more than the same amount of money available in the future.

[Find out the perks, pitfalls of simplifying student loan repayment.]

In the current calculation, the discount rate is simply the interest rate on U.S. Treasury securities. That is, it is the cost to the government of obtaining the funds through Treasury borrowing.

Since Treasury bills are one of the world's safest investments, using them as a discount rate doesn't take risk into account – that's been done in the first step – but does account for the lower value of money obtained later.

It's easy to see why federal student loans are projected to make a lot of money using this calculation: subtracting the low current interest rate for Treasury bills from fixed student loan interest rates of 6.8 to 7.9 percent – assuming the 3.4 percent rate on subsidized loans does double July 1 – results in a net gain for the government. In fact, under this accounting method, the budget office calculates that the government will net about $184 billion from 2013 to 2023.

However, some analysts think that this accounting is flawed because it does not sufficiently reflect risk, including, for example, the risk of default. They argue for a "fair-value" approach that would use a market-based discount rate.

In other words, the discount rate would not be based on the government's cost of borrowing but on the higher interest rate the private sector pays, which reflects a much higher degree of market risk.

Using the higher discount rate in the fair-value approach leads to far different results. The CBO projects the federal direct loan program would cost the federal government $95 billion between 2013 and 2023 instead of earning $184 billion.

That's a whopping difference – and implies far different student loan policies. So which calculation, and which policies, should be chosen?

[See how the Student Loan Fairness Act could benefit borrowers.]

Ultimately, the Student Loan Ranger feels that the current accounting method – which has worked well for decades – is the correct one for a few reasons, many of which are articulated in a report by the Center for American Progress.

Corporations and individuals are, and should be, risk averse because the consequences of unanticipated risks can be devastating to them. They should also, for similar reasons, want to ensure they make a profit. The fair-value approach adds value in that context.

But the federal government should be risk neutral and is not aiming to make a profit. The fair-value approach would drive up the budgetary cost of the student loan program in order to account for eventualities that are unlikely to occur.

This would be of little value because unlike a private entity, the federal government – with its far greater resources and ability to print money – is well-equipped to handle those eventualities. And the downside of increasing the budgetary cost of the student loan program is considerable, because it will mean there is less money available for other valuable programs such as Pell Grants.

Instead, it should focus on budgeting accurately and ensuring its money is spent wisely. A move to fair-value accounting would burden student loan borrowers with unnecessarily high interest rates for the foreseeable future.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.

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