Farm loan waiver is no solution to farmers’ woes

The focus should be more on making the prime minister’s crop insurance scheme a success than demanding farm loans waivers from banks


The BJP’s election manifestos in Uttar Pradesh and Uttarakhand and the Congress manifesto in Punjab have committed to farm loan waivers, putting pressure on banks. Photo: Reuters
The BJP’s election manifestos in Uttar Pradesh and Uttarakhand and the Congress manifesto in Punjab have committed to farm loan waivers, putting pressure on banks. Photo: Reuters

Last week, the Indian National Congress at the Maharashtra assembly submitted a breach of privilege notice against State Bank of India chairman Arundhati Bhattacharya for “insulting farmers and the House” by her remarks on farm loan waiver. The leader of the opposition in the state assembly, Radhakrishna Vikhe Patil, was upset with Bhattacharya because she “did not apologise for her remarks despite the Congress’s demand”.

The Congress and the Nationalist Congress Party have been demanding a loan waiver for around 3.1 million farmers in Maharashtra who owe Rs30,500 crore to the banking system. “Bhattacharya is not a policymaker and she cannot take a decision regarding loan waivers to the farmers. She had no right to make such comments,” and her remarks were “violation of the rights of the legislature which make laws,” Vikhe Patil said.

What did Bhattacharya say? The boss of India’s largest lender early last week said farm loan waivers disrupt “credit discipline” among borrowers as they expect future loans to be waived as well. Bhattacharya feels that while it is important for banks to make credit available to the farmers, maintaining credit discipline is equally important. “For the time being, we will get our money back as the government will pay for it. But the farmers will keep waiting for the next elections for the next round of waiver,” she said.

Bhattacharya, in fact, echoed former Reserve Bank of India (RBI) governor Raghuram Rajan’s concerns—“Repeated loan waivers by various state governments distort credit pricing, thereby also disrupting the credit market.”

Vikhe Patil did not move a breach of privilege motion against Rajan in the past and I hope he would not do so against a columnist who is not a policymaker and probably, in Vikhe Patil’s view, doesn’t have any right to have an opinion on this.

The Bharatiya Janata Party’s (BJP) election manifestos in Uttar Pradesh and Uttarakhand and the Congress manifesto in Punjab have committed to write off loans of small and marginal farmers. In the recent past, Tamil Nadu had waived off loans of small and marginal farmers. The ousted Samajwadi Party government in Uttar Pradesh had in 2012 announced a waiver of crop loans up to Rs50,000 taken from state cooperative banks. There are many more such instances.

The mother of all farm loan waivers happened in 2008 when the Congress-led United Progressive Alliance announced a Rs60,000-crore debt waiver package for small and marginal farmers in the budget which was later extended to the large farmers as well and the amount increased to Rs71,600 crore. It benefited at least 36.9 million small and marginal and 5.97 million large farmers. The small farmers are those who have a land holding of up to one hectare (2.5 acres), while the marginal farmers have land holding between 1-2 hectares. Around 80% of all land holdings in India are with the small and marginal farmers.

This is not the first time the Indian government has doled out concessions to farmers. In 1989, the Janata Dal government, a coalition of several parties representing socially underprivileged and lower castes and farmers, floated the first-ever agriculture loan write-off scheme. A brainchild of the then deputy Prime Minister and minister of agriculture Devi Lal, the scheme waived loans up to Rs10,000 issued to farmers, landless cultivators, artisans and weavers by state-run banks. Till 1992, more than 44 million farmers benefited from this scheme to the tune of Rs6,000 crore.

Incidentally, Bhattacharya’s comment was made a day after the State Bank announced a one-time settlement scheme for around Rs6,000 crore farm equipment and tractor loans. Such one-time settlements, where banks settle for less than what the borrowers are to repay or take a haircut, is a commercial decision and part of the bad loan recovery process. However, when farm loan waivers are decided by the political parties and thrust upon the banks, it destroys the credit culture as the borrowers (in this case, the farmers) are encouraged to think that they don’t need to repay bank loans even when they are not distressed.

Indeed the government reimburses the banks for such loans waived but the damage to the credit culture is irreparable. Any delay in the government’s reimbursement and borrowers’ refusal to repay their loans hurts the cooperative banks the most. Typically, the commercial banks have funds to disburse new crop loans but the cooperative banks—which use their entire deposit base to lend to agriculture and depend heavily on recovery of loans to give fresh loans—find it difficult to remain in business when farmers stop paying. Also, the farmers stop getting fresh loans.

Most politicians—irrespective of the parties they belong to—are happy to exploit the banking system to do good to the farmers and loan waiver is one of many tools they use. In November-December 2016, when the demonetization exercise was on, RBI relaxed the bad loan recognition norms for small loans as many borrowers in the informal sector were temporarily affected by the currency shortage but many politicians misinterpreted this as a payment holiday for the farmers, leading to a partial halt in repayment of loans in parts of Uttar Pradesh, Madhya Pradesh and Maharashtra.

Agriculture in India is facing a tough time because of its dependence on the monsoon. Over 50% of the crop area does not have any irrigation facility and almost three-fourth of the annual rainfall is concentrated in four months a year, between June and September. A deficit monsoon for two consecutive years in 2014 and 2015 and unseasonal showers ahead of the winter harvest in 2015 have hit the farmers hard. Entire south India is bearing the brunt and Tamil Nadu is facing the worst drought in 140 years. Farmers from the southern state last week staged protests at Delhi’s Jantar Mantar carrying skulls of fellow farmers who have committed suicides. More than 5,500 farmer suicides were recorded in 2014 and the figure rose at least 40% in 2015, with Maharashtra contributing the most, according to the National Crime Records Bureau.

Indeed the situation is grim but is the farm loan waiver the right solution? Or, should the government look at diversifying the cropping pattern and developing new technology to fight drought? Incidentally, the latest Karnataka budget has chosen to focus on managing water. There was pressure on the chief minister to waive crop loans but the state budget while continuing the interest-free, subsidized loans for farmers, raised allocations to water resources to a record high of Rs18,028 crore or 11.2% of the budget. After a gap of more than a decade, the state government will also do cloud seeding. Similarly, the Maharashtra government has refused to buckle under pressure for farm loan waiver and instead allocated close to Rs14,000 crore to the agriculture sector, primarily for irrigation.

The Pradhan Mantri Fasal Bima Yojana, the new crop damage insurance scheme approved by the Union cabinet in January 2016, is also a vast improvement on the old crop insurance model in vogue since 1970s. The new scheme which has the lowest premium so far has proposed use of remote sensing, smart phones and drones for quick estimation of crop loss and speedy claim process. The focus should be more on making this a success. Conserving water, improving the irrigation facilities, and developing agriculture markets and competition can be the building blocks for growth in agriculture and mitigating farmers’ woes. State governments are barking up the wrong tree by resorting to loan waivers.

Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of A Bank for the Buck, Sahara: The Untold Story and Bandhan: The Making of a Bank.

His Twitter handle is @tamalbandyo.

Respond to this column at tamal.b@livemint.com.

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