Should Loan Waivers to Farmers be Banned?
Most financial dailies and newspapers carried editorials or opinions on farmers’ loan waivers, following the anguish expressed by the Chairman of State Bank of India (SBI) on the scheme announced by the Uttar Pradesh (UP) government. The Reserve Bank of India (RBI) Governor, releasing the Monetary Policy for the second quarter of 2017, called the farmer loan waiver scheme “a farsighted policy of the politicians that would do harm to the borrowing discipline.” Even viewed in the backdrop of experiences of 1990, 2008 and 2014, the reports from the Comptroller and auditor general (CAG) tabled in Parliament and the legislatures exposed the weaknesses of the State adventures.
 
Farmer loan accounts of the banks are as perfect or as imperfect as the land records of the farmers, as has been noted in an evaluation study of the Telangana crop loan waiver programme conducted by Development and Research Services Pvt Ltd (DRS), at the behest of the Government of Telangana.
 
The questions requiring answers are: 
Is lending to peasants a sovereign risk or credit risk? 
Is the peasant by habit as much a defaulter as borrower? 
Is the lender following discipline in extending credit to the farmer? And 
Will the lender’s discipline precede or succeed borrower’s discipline? 
 
The Ten Myths in farm lending:
1. All farmers require loan waivers.
The fact is that they require loans equal to the flow of a live river. The reason is that their liquidity is always locked up in soil or silo.
 
2. All banks lend for farming, knowing the nuances of the activity, and lend in time and to the extent required.
 
Most of the banks lend to crops and activities mechanically as per norms of National Bank for Agriculture and Rural Development (NABARD). Lending to farming is just arithmetic and neither related to the exact needs of farmers nor in time.
 
3. Farm Credit is supervised credit.
Several field officers/ rural development officers cannot identify the farmer with the farm cultivated – owned vs leased, extent, save exceptions and they rarely have time to step out to the farms and villages. 
 
4. Banks invariably meet all the credit requirements of farmers.
Rarely. Banks distinguish production credit and consumption credit, but the latter is left for the moneylender to take care of.
 
5. Banks are meeting the targets under crop loans assigned to them and even exceeding them. 
Banks make book adjustments, barring exceptions.
 
6. Banks issue Kisan Credit Cards (KCC), which are like credit cards for the farmers.
KCC is not like the normal credit card that can be swiped by the farmer to the extent of the assigned limit at will and repay as and when crop harvest is sold. 
 
7. Group Loans (Joint Liability Groups-JLGs), Rythu Mithra Groups, Self Help Groups (SHGs) are effective means to deliver credit to lease-hold farmers.
Though SBI did it in the initial years of lending for agriculture, it abandoned group loaning. NABARD tried to push JLGs but did not find favour with banks.
 
8. All farmers are willing to pay for insurance.
Farmers are apprehensive of all insurance schemes as, at no point of time, farmers get all their claims responded to with a sense of urgency. 
 
9. Farm credit is insured. 
The obverse is true. Even the worst disasters never got the claims of farmers settled to the extent claimed, on one score or other.
 
10. All big farmers are honest.
They have other businesses and they invariably have surplus, as agricultural income is not taxed. 
 
The above myths should be adequate to say that the borrower discipline is as strong or weak as the lenders’ discipline.
 
The decision to write-off should vest with Parliament only in cases of acute natural calamities. This is in conformity with Chanakya’ Arthashastra principle that advocated loan write-off of farmers in such events. 
 
Political parties should be barred from making farm loan waiver as electoral promise. Though loan waiver per se is not an undue favour to the distressed farmers deprived of his source of income, the Election Commission should treat it as largesse on par with corrupting the voter. 
 
It is income and not credit that should be ensured for farmers. Whenever farmers do not get adequate price for their produce (minimum support price -MSP) or, in the event of loss of production, the State shall compensate the farmers the gap in income and the loss of income due to loss of production. Markets and credit institutions should work for better insurance mechanisms, when there will be no need for either the political parties to give bonanza or the banks to worry over the sovereign risk of write off that could decimate the credit discipline. 
 
(Dr B Yerram Raju  is an economist and risk management specialist.)
 
Comments
Sanjeev B
5 years ago
1. What about the farmers who paid back their loans? Are they fools?
2. The amount needs to be made good by the government through their cheque book if they want to do this. Banks cannot fund this.
3. Why doesn't the government insure the loans? Will that not take care of this problem? Can state and private insurers come together to share the risk of default across the country? Can this risk premium be included in the interest charged for these loans?
Govinda Warrier
5 years ago
An excellent analysis. Without going seriatim, I copy below my response to Reserve Bank of India (RBI) Governor Urjit Patel’s expression of displeasure last week, over the current spate of farm loan waivers, who said that these (waivers) adversely affect the culture of repayments as well as put a severe burden on the exchequer.
“I think it undermines an honest credit culture. It impacts credit discipline. It impacts incentives for future borrowers to repay. In other words, waivers engender a moral hazard,” he said, after announcing the first bi-monthly monetary policy for 2017-18.

The RBI governor added, “We need to create a consensus that such loan waiver policies are eschewed. Otherwise, sub-sovereign fiscal challenges in this context could otherwise affect national balance sheets.”
My Response:
This refers to Abhijit Lele’s brief report “Urjit Patel slams loan waivers” (Business Standard, April 7). RBI Governor’s observation “I think it undermines an honest credit culture. It impacts incentives for future borrowers to repay. In other words, waivers engender a moral hazard…” echoes the gist of RBI’s consistent stand on loan waivers which was articulated on several occasions in the past including at the time of the introduction of Agricultural and Rural Debt relief Scheme (ARDRS), 1990. Centre and state governments, on most of the occasions, went ahead with their political agenda of such waivers which are partly responsible for spread of the malignancy of financial indiscipline to other sectors.
This time around, RBI has given the message loud and clear and the reference to ‘national balance-sheets’ should wake up the policy makers and opinion makers to the reality of the situation. When taxpayers money is diverted to purposes other than those for which taxes are collected and budgeted, governments will have to borrow to meet the extra burden which will create imbalances in fiscal management. Many popular schemes like ‘freebies’, tax concessions to corporates, and refusal to bring certain sectors like agriculture within tax net are already making the budget exercises at Centre and states level slip out of the accepted contours of financial discipline.
While RBI advice to move towards a consensus to eschew politically motivated agricultural loan waivers is timely and welcome and needs to be taken seriously, simultaneous efforts are necessary to provide relief to genuine borrowers. Such supports would include providing crop insurance, ensuring all linkages for getting timely inputs at reasonable costs, irrigation facilities, cost-related farm gate price, storage and transport facilities for perishable farm products and so on at reasonable costs.
M G Warrier, Mumbai
Chandragupta Acharya
5 years ago
If I am not wrong, there is already an Election Commission decision that freebies distort the free and fair conduct of the election. Not just loan waiver, an enabling framework to ban freebies, even as part of the election manifesto exists. But the EC has not acted on it. This issue is now ripe for a PIL.
darshan pandher
5 years ago
This ridiculous appeasement policy at the cost of Honest Taxpayers money to Govt for Votes ... MUST STOP!
At the same time,Govt is duty-bound to protect 'Cost of Production' to Farmers by -
1. Sharing Scientific Knowledge for Soil Testing,Fertilizers & Pesticides to optemise production.
2. Provide proper irrigation facilities & power to encourage farming.
3. Provide proper Storage and Transportation arrangements to avoid Crop Losses.
4. Ensure availability of Good Quality Seeds,Farm Equipment and Information to reduce dependency on 'Farm Loans'.
5. Promote modern techniques/methods of farming to make it profitable.

May be, then 'Farm Loans' will become a 'History"... Soon!
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