Bankers are wary of the government’s move of waiving interest and writing off farm loans on a large scale. They feel it will end up destroying the credit culture in India. “It’s against the principle of equity and justice. Who will take care of those farmers who have taken loans from moneylenders but are not in a position to repay?” asks one banker. “Helping farmers in distress is fine but won’t such a package be a disincentive for those who are regular in paying their dues to banks?” wonders another. None of them can talk openly against the government, the majority owner of public sector banks that account for close to 70% of the industry.
If banks can restructure loans for corporations, bring down the interest rates and offer them a longer repayment period with a moratorium and even freedom to switch from rupee loans to cheaper dollar loans, what’s wrong in offering concessions to agricultural borrowers? After all, farmers’ produce suffers from natural calamities as much as companies get affected by cyclical downturns and neither farmers nor corporations have control over these developments.
Indeed, at least Rs50,000 crore worth of stressed assets have been restructured by the Indian banking system over the last few years on the corporate debt restructuring or CDR platform. Any corporate loan worth Rs10 crore and above can be recast, provided 60% of creditors by number and 75% by value agree to it. Twenty-eight public sector banks, 17 private banks and 12 financial institutions are members of the CDR forum and the core committee meets periodically to clear loan recast proposals.
If bankers do not find it embarrassing to restructure corporate loans, why would they shy away from offering concessions to farmers? After all, instances of fund diversion by farmers are far less than in the corporate sector.
However, banks alone cannot save the farmers. Since 1990, when then deputy prime minister Devi Lal excused farmers from paying bank loans up to Rs10,000, the Indian banking industry has systematically been abused as a lender of the last resort for distressed farmers. After it came to power, the United Progressive Alliance government has rescheduled farm loans twice, waived interest in certain regions once and forced banks to offer all small farm loans at 7%, chipping in a 2% subsidy. But credit flow alone cannot change the scenario.
India is the second largest producer of rice and wheat in the world, the largest producer of pulses and the fourth largest producer of coarse grains. It is the largest producer of spices such as turmeric, coriander, fennel and fenugreek. It is the second largest producer of coconut, cashewnut, ginger and black pepper as well as groundnut and fruits and vegetables. It is the highest milk producer and a dominant player in eggs and meat. Still, agriculture’s contribution to the nation’s gross domestic product has been going down sharply.
This is not because of lack of credit flow alone. For instance, the market for agricultural produce continues to be subjected to government interventions through the minimum support price (MSP) system. This has changed the cropping pattern in favour of rice and wheat at the cost of the others such as cereals, oilseeds and pulses, fruits, vegetables and poultry. Even in years of bumper production, the MSP mechanism helps maintain the prices of rice and wheat at a high level, making the cultivation of these two crops more remunerative than pulses and coarse cereals.
The concept of MSP can help the farmer when it is backed by an efficient procurement system. In the case of wheat and rice, it helps farmers but for oilseeds and copra, the support price is of no use as government agencies are not willing to buy these commodities and hence the open market decides the price.
Banks will start looking at rural India as an opportunity and not an obligation as it has been made out to be when the government puts in place the right architecture for farm financing. For instance, credit counselling for farmers is essential for diversification of their economic activities. It can be done through self-help groups and monitored by the National Bank for Agriculture and Rural Development. Then, land mortgage procedures need to be simplified. Once the state governments start computerizing the land records and there is a national online registry for such records, banks will be able to cut down the transaction cost and time for granting farm loans.
Finally, along with education, electrification, irrigation and better connectivity, farmers need the protective umbrella of insurance when the natural calamities strike. The current crop insurance system is structurally faulty and does not take care of individual cases.
After the first farm loan write-off in 1990, for 15 years the banking industry shied away from extending agriculture loans. Since coming to power in 2004, the UPA government forced them to step up their farm loan portfolio. Instead of waiving interest and writing off loans, the best way of extending a helping hand to distressed farmers will be by setting up an agriculture credit stabilization fund. This can be used to help farmers in distress without creating a moral hazard for the government and destroying the credit culture.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint. Please email comments to firstname.lastname@example.org