Loan Waivers Damages Credit Culture and Increase Indebtedness of Farmers: SBI
Moneylife Digital Team 06 January 2020
The newly formed Maharashtra government has announced a loan waiver of up to Rs2 lakh for farmers, with a cut-off date of 30 September 2019 and providing relief to non-defaulting farmers who have a loan of above Rs2 lakh. Such loan waivers damages the credit culture and results in an increase in indebtedness of farmers, says a research report.
In the report, Dr Soumya Kanti Ghosh, group chief economic adviser of State Bank of India (SBI) says, "Typically, the farm loan waiver amounts are cleared in several yearly instalments to banks by respective state Governments and thus the existing kisan credit card (KCC) accounts continue to be NPA category till the date of final receipt of the waiver amount. In Madhya Pradesh, for example, the total amount cleared in first year is close to 10%. This invariably results in a situation where states that have granted loan waivers witness farmers having lower access to formal loans and hence higher indebtedness and thereby declining agricultural productivity. In FY2018, Maharashtra, Karnataka and Punjab had announced farm loan waiver, and during the same year, the growth in fresh loan disbursement was -40% in Maharashtra, 1% in Karnataka and 3% in Punjab."
Notwithstanding the economics, Dr Ghosh says, the politics of loan waivers typically veers around the fact if the banks can write off non-performing assets (NPA) of the industry, why not agri farmers. However, he says, "Such arguments are mischievous and frivolous. For example, even though agriculture NPA is Rs1.1 lakh crore or 12.4% of overall NPA, we also need to account for Rs3.14 lakh crore loan waiver announced in the last decade. Hence, logically, agri NPA or burden for the exchequer and banks could be as much as staggering Rs4.2 lakh crore. If we add the potential Maharashtra loan waiver amount, it could be at Rs4.7 lakh crore or 82% of industry NPA!"
"The new insolvency law now ensures that the defaulting company loses stake apart from market penalising in terms of adverse price discovery between a good and a bad borrower. However, for the farm loan waiver, the poor farmer ends up as the loser with a significant increase in indebtedness as loan waivers binds the farmer in debt pangs and the only solution is a new loan waiver!" the report says.   
"We must shun loan waivers and build measures to address rural woes," Dr Ghosh says, adding, "These could be done by the government and Reserve Bank of India (RBI) in unison. Firstly, we must build competitive and inclusive value chains for food products. Secondly, implement the model agricultural produce and live stocks marketing (APLM) act of 2017, which will help in removing the entry barriers.
Thirdly, we are not sure what has happened to the suggestion of providing a tenancy certificate to tenant farmers as was promised in the Budget 2018. We must do it on a war footing."
"Fourthly, removal of Hypothecation Charge on Crop Loans. Fifthly, the KCC scheme must be revamped. A combination of revolving credit like share 40% and term loan with 60% share with flexibility of payment could be introduced in lieu of the current KCC scheme. We believe that the monthly income of farmer will go up by 35% simply by revisiting the current KCC norms by the RBI. Let us all make a rule to shun populism for the agri sector, "he says.
According to SBI, going by Maharashtra's previous experience on farm loan waiver, this time the cost could be at least Rs45,000 crore, even hypothetically assuming that the farmers who will get the maximum benefit and complete loan waiver are unchanged from the last loan waiver. There are 1.37 crore farmers in Maharashtra. 
It says, "The cost could go up to Rs51,000 crore if the number of farmers covered increases from the current levels. The cost could come down by Rs12,500 crore if the new dispensation decides to postpone the payments outstanding under the earlier loan waiver scheme into the new one or decides to limit the coverage of farmers under the scheme."
B. Yerram Raju
2 years ago
It is not for either GoI or RBI or both together to take a call as much as Parliament and Legislatures or the Chief Election Commissioner. Loan waivers as an election slogan when stopped the evil has potential to vanish.
Second, even Chanakya in Artha Sastra considered loan waiver by the government as valid when there is erosion in the wealth of the farmer with natural calamities. The measure by itself is in order if there is total loss of assets for the farmer in drought, floods, cyclone, earthquakes and holocausts. The waiver is through the exchequer and not through the Bank.
Third, if the Banks had lent the farmer not by the ordain of the Union Budget but by themselves, the evil would not have occurred. There is collapse of institutional mechanism in lending to the farmer whose production is locked up either in land or stock right when cash is required. Banks rush to lend to big farmers and farmers in cities and only walk slowly to the farmer. Farmers hardly realize that they are walking into the trap of the money lender most of whom are the politicians who ask for votes, with the failure of institutional lending mechanism.
Farmers cannot be lent without extension and viewing all his requirements - as every small and marginal farmer invariably holds milk animals, a few birds, may be a fish pond if he is in coastal area, and a silo. Comprehensive view of farmer has capacities to cross-hold lender's risks but hardly such view is taken with the type of over-emphasis and hackneyed approach to crop loans.
The article is at best an arm-chair view of a lender!!
Replied to B. Yerram Raju comment 2 years ago
Even though the waiver is through a bank, ultimately it is through the government, isn't it, and through deficit financing if tax money with the government is not enough.
But as Dr Yerram Raju says, we are not taking a comprehensive view of the farmer's requirements. And where write-off or write-down is required, we are not taking into account the natural factors like lack of rain, production and marketing facilities, and what can be done to mitigate them but are swinging into loan waivers to fulfill the politicians' electoral promises. Economists have failed to discover methods of providing relief to farmers other than periodical loan sops.
-Dr KS Rao, from Cupertino, California.
Sandeep More
2 years ago
So true. However, most of smaller farmers are so uneducated that they are unable to understand the mod techniques, leave alone the implementation part. So they go for loans to meet the working capital needs.

If the soil does not have the nutrients, the TOUCH ME NOT PLANT fixes the same. However, the farmers consider this useful plant to be a weed and burn it, the moment they spot it. Cow dung could be a supplementary option.

Storage facilities r missing. So, the middleman apparently helps the farmer even though the produce has to be sold at a pittance. The MNCs could buy the produce at a remunerative rate from the farmer but the middlemens lobby is too strong to make a meaningful penetration.

The loan waiver would ultimately prove to be disastrous for our nation. It discourages sincere efforts and that day would not be too far when we might have to import agricultural produce while at the same time waive away the loans too without much productivity.

Sandeep More
Replied to Sandeep More comment 2 years ago
Our concentration and efforts should be to eliminate the cause of the problems through innovation and sustainable solutions rather than keeping the farmers on ICU through LWs
Dr.Dhananjaya Bhupathi
2 years ago
1. “Notwithstanding the economics, DR Ghosh says, the politics of loan waivers typically veers around the fact if the banks can write off non-performing assets (NPA) of the industry, why not agri-farmers. However, he says, "Such arguments are mischievous and frivolous”.
2. I do not agree with the enlightened view of DR.Ghosh. SBI management writes off NPAs worth INR.Trillions every year; lent by its Board + apex level functionaries [CMD/CEO/EDs]. SBI with moral support from RBI, callously, keeps the details to its chest in violation of various SC Judgments. It is the same case with all PSBs. These huge sums of money are not their grand-pas’ properties. Why can’t GOI+ RBI plug such loopholes in the Banking industry to prevent the flight of Indian Wealth outside Indian borders through the fugitives?
3. “We must shun loan waivers and build measures to address rural woes," DR.Ghosh says, adding, "These could be done by the government and Reserve Bank of India (RBI) in unison. Firstly, we must build competitive and inclusive value chains for food products. Secondly, implement the model agricultural produce and live stocks marketing (APLM) act of 2017, which will help in removing the entry barriers.
4. I, fully, agree with DR.Ghosh. Whatever, the Executive indulges-in to prevent the farmers’suicides, it is fine.

S Balakrishnan
2 years ago
Mr Ghosh might like to ponder on the foll
1 corporate bad debts of banks are Rs 10 lakh cr thereabouts 2.5x or more of agri exposure
2 a good percent of big business loans has been siphoned out into private pockets
3 has mr ghosh come across any farmer with a Swiss bank account?
4 despite agri bad loans, overall agri supply and Stks areextremely comfortable.
A contrast to mothballed power projects,roads,airlines,etc

Intellectual honesty has never been the strong suit of economists

S Balakrishnan
2 years ago
In principle all loan waivers are bad.
But This chap's bank has the terrific record of converting debt to equity in a wind power co and a now defunct airline whose promoter slipped abroad. God knows how many other similar cases.
Both were done at 'average mkt price' using for justification a sebi rule which applies only to normal situations not distress cases.
Predictably both conversions are worthless. Does he realise it's public money invested in garbage.?And did he as the in house 'economist' have anything to say when his bank took these decisions. If not he's either incompetent or gutless.
Today's paper says the wind power co will get another debt write off. Unbelievable.The promoter argues the co is not viable if tariffs are to be competitive. So he wants indefinite subsidy and still wants to run the co after multiple failures.any thoughts mr ghosh?
I hope this guy focuses on the total mess in his bank instead of pontificating.
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