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."