Farmers encamped outside Krung Thai Bank head office recently.

Debt relief for farmers is one such policy that gave the wrong perception among low-income rural folk: that they were guaranteed a bail-out whenever they incurred problems.

Large commercial banks have recently felt the brunt of the moral hazard among farmers that has been created by the Thaksin administration.

Since the Supreme Administrative Court rejected the two Royal Decrees for Egat's privatisation, resolving the issue of conflict of interest has become a benchmark for all future privatisations.

This was not only a victory for the Foundation for Consumer Organisations, which petitioned against the decrees, but also showed that privatisation procedures that lacked transparency could legitimately be corrected.

However, the debt-relief problem is unlikely to be corrected as easily, though the policy is being revised so as to lead to a lower level of moral hazard.

The government earlier promised farmers a "haircut" on debts and told state and private banks that it would provide at least Bt10 billion to subsidise the scheme. Many farmers therefore assumed their debts would be taken care of without any conditions.

Like other populist policies by the Thaksin administration, debt-relief programmes gave borrowers the impression they would be rescued.

Many felt they had no obligation to repay borrowed money, much of which was used to buy non-productive luxury items instead of being invested in income-generating endeavours that were anticipated by the government.

The farmers' debt-relief programme gave them easy money, a move which ran counter to the policies of rural development organisations. Such bodies ruled it was not advisable to "give fish directly to the poor". They taught it was better to "teach them how to catch fish".

However, it seemed fish were indeed loaded onto farmers without their having learn how they could be caught.

On Wednesday, about 5,000 farmers rallied at state-run Krung Thai Bank's headquarters, demanding debt relief. They pressed its management to sign a memorandum of understanding that allowed borrowers to repay only half their loans and for interest charges to be waived.

This was the second bank MoU obtained by farmers.

The first was made last December when the bank caved in to demands to waive half the debts of loans worth Bt1 million or less. Interest payments were also waived.

But those who borrowed between Bt1 million and Bt2.5 million had to repay 90 per cent of the original sum, although interest payments for these loans were also scrapped.

Despite the MoU, farmers were disappointed with the slow action that followed. The bankers said this was due to a lack of proper documentation by farmers.

As a result, angry farmers returned to rally at the bank, and - fearing social unrest might ferment - the bankers capitulated.

Later that afternoon, the rally turned to Bangkok Bank's head office on Silom Road, seeking similar conditions. This bank also capitulated.

But a banking sector source expressed concern that a bad precedent had been set, and that farmers' demands would now be never-ending.

"We'd just given them relief in December. Now, they come again with more demands," he said.

Creating moral hazard has been a concern for bankers since the 1997 financial crisis, when debts had ballooned as the local currency collapsed - making many borrowers unable to service debts.

The period saw the growth of strategic non-performing loans, where wealthy individuals refused to repay debts. Dismayed by the situation, many good debtors refused to pay as well. It took bankers many years to resolve this crisis.

Today, the government has returned the nightmare to the front doors of the banks.

The dilemma now rests with farmers, who can repay their debt but are thinking: Why should I do so if others are exempt?

If debt relief has to be endorsed, it should distinguish good borrowers from bad ones. It should reward those who honour their repayments, and not those who do not.

Policymakers should remember the Buddhist teaching that says everyone has to pay for their deeds. Otherwise the financial system risks undermining itself by promising debtors easy money, which in fact was financed by taxpayers.

Jiwamol Kanoksilp

The Nation