Farm Loan Waiver
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FARM LOAN WAIVER – ISSUES IN IMPLEMENTATION The Rs 60,000 cr loan waiver package presented by the Union finance minister P Chidambaram is now engaging the attention of the banking sector, economists and policymakers alike. Some sections have put forward the argument that the relief package may not really bring too much cheer to some segments of debt-trapped farmers, particularly poor farmers in the dryland areas and those in the remote hilly regions of the country. As per the general definition, a marginal farmer is one who has holding up to one hectare (2.47 acre) and the small farmer is one who has holding up to two hectare (5.94 acre). According to the recent edition of Union agriculture ministry’s Agricultural Statistics at a Glance, resource poor farmers in dryland areas of Rajasthan have holding ranging between 54 acre to 175 acre. These lands do not have any assured irrigation and are entirely dependant on erratic monsoon rains. Similar are the cases in other parts of the dryland regions in different states like in Tamil Nadu where the holding is up to 60 acre, in Haryana, Madhya Pradesh and Maharashtra up to 54 acre, in Sikkim up to 50 acre, in Uttar Pradesh up to 45 acre, in Andhra Pradesh between 35 to 54 acre, in Bihar up to 30 to 45 acre, in Gujarat between 20 to 54 acre, in Haryana up to 54 acre, in Himachal between 30 to 75 acre, in Orissa between 30 to 45 acre. According to the 2001 Census data, 742.6 million people or 72.2% of the country’s population live in rural areas and are directly or indirectly dependant on agriculture. The average annual exponential growth rate of the population is estimated at 1.95%. Out of the total population of 742.6 million people, Chidambaram has identified 40 million people as beneficiaries under the Rs 60,000 crore loan waiver package. All agriculture loans of 30 million small and marginal farmers that were disbursed by banks till March 31, 2007 and were overdue on December 31, 2007 and remained unpaid till February 29, 2008 would be waived off. According to government's estimate, these unpaid loans would aggregate to Rs 50,000 crore. For another 10 million farmers, the government has decided to offer a one time settlement package for clearance of their outstanding
loans relating to these dates. The package would offer a 25% rebate to farmers for payment of the balance 75%. Farmers, whose loans were restructured and rescheduled in 2004 and 2006, will also be eligible for benefits of a waiver or one time settlement package. The package implementation is expected to be completed by June 30, this year. But in the meantime, the farmer who gets the assurance for waiving of his loans or who enter into a one-time settlement of loans can avail fresh loans from banks. . The director of the National Centre for Agricultural Economics and Policy Research, PK Joshi, said: “The argument in favour of such a provision was that the majority of farmers, who committed suicide, could not repay their loans. This bonanza will undoubtedly give some relief to roughly 35% of small and marginal farmers and nearly 50% of large farmers; largely confined in favourable environment. Those who are located in underprivileged and marginal areas (especially rainfed and backward) are often deprived of credit from the formal banking sector, such as commercial banks, cooperatives and regional rural banks, will not gain from it. The decision to waive farm loans on an unprecedented scale announced in the Budget has attracted widespread comment. Almost all political parties have welcomed the move. In fact, most of them were vociferously clamouring for such a measure to relieve the farm sector from a “crushing” burden of debt. The Budget speech has announced the decision to waive farm loans and also estimated the cost (Rs. 60,000 crore) that government has to bear. It does not spell out the basis of the estimate nor of the institutions, loan categories, and class of borrowers that will be covered by the scheme. Several aspects need to be clarified: 1. By definition, the scheme can apply only to those who have outstanding loans with institutions. Nearly three-fourths of all rural households and 60 per cent of farm households report that they do not have any outstanding debt. All households with outstanding debt may not have outstanding institutional debt. Thus the large majority of even farmers will not benefit from the waiver. If only farmer loans are eligible, the proportion of beneficiaries will be even smaller. 2. Both access to institutional credit and the proportion of outstanding debt are skewed in favour of larger farms. Cultivator households with less than 2 hectares account for 85 per cent of all
farm households; and report a lower incidence of debt (46 per cent) and of outstanding debt (30 per cent) than the overall average. 3. Institutional loans include direct lending (to meet needs production as well as consumption) and “indirect lending” for allied activities (such as input distribution, trading, transport and processing of farm produce). The latter comprise about half of outstanding loans of cooperatives; 55 per cent in regional rural banks; and a little under half in scheduled commercial banks. There is hardly any justification for waivers on indirect loans. 4. The magnitude of outstanding debt of rural households, going by National Sample Survey (NSS) data, is less than outstanding debt reported by the institutions in the cooperatives and substantially so in regional rural banks. Since both are intended to lend mostly in rural areas, this difference suggests that they also carry a sizeable portfolio of non-household, non-rural loans. 5. The basis of the estimate that the waiver will cost Rs 60, 000 crore is far from clear. There is good reason to believe that a generalised waiver of all overdues will benefit non-rural borrowers to a considerable extent; that the large majority of rural households, including those in the below 2 hectares category will not benefit; and that the magnitude of benefit accruing to them will be considerably less than Rs.60, 000 crore. Benefits in rural areas will accrue to a rather small fraction of households and the magnitude of relief to the beneficiaries is likely to be considerably less than the cited figure. These considerations argue for a close second look at the rationale, scope, and intent of the scheme. But it is also necessary to warn the public of the larger adverse effects of waivers on the rural credit system. Supporters of the scheme argue that this one time relief is a necessary measure to address the current agrarian crisis and that it would enable farmers to restart on a clean state. But this has been said every time in the past when such waivers were announced. Experience shows that waivers encouraged borrowers to presume that they can sooner or later get away without repaying loans. It reinforces the culture of wilful default, which has resulted in huge overdues and defaults in all segments of organised financial institutions. The deterioration in the cooperative credit system is, in large measure, due to the conscious state policy of interference in the grant and recovery of loans.
Cooperatives have by far the greatest reach in terms of accessibility, number of borrowers, and delivery of credit to the rural population. Concerned by their near collapse, the Central government set up a task force to suggest ways to arrest the trend and revive them. The task force suggested radical changes in the legal and institutional framework essential to enable and induce cooperatives to function as autonomous and self-regulating entities. It emphasised the need to eliminate government interference in grant of loans, recovery processes, and waiving of dues from borrowers. The Central government accepted the recommendations. Extensive consultations with States led to a political consensus to accept and implement the reform package. The Central government has committed to provide around Rs. 18,000 crore to clear accumulated losses over a period of time and linked to actual fulfilment of specified conditions. Most States have since given their formal commitment to this effect and agreed to abide by the conditions for availing of Central financial assistance. Supervised implementation is under way and has made significant progress in several States. This programme thus already covers a significant part of what is being attempted in the current waiver scheme. It is ironical that the decision to go for a general waiver comes even as the above reform programme is under way. It obviously goes against the central thrust and spirit of the reform programme. Since the proposed general waiver is wholly underwritten and funded by the Centre, the need for the kind of restructuring and conditionality attached to central assistance is likely to be questioned. Doubts will be raised and pressures will build to dilute or even to override the programme. It is very important that the government clarifies its position on the status of the current reform programme and how such pressures can be contained so that apprehensions about the prospect of much-needed institution reform in cooperative credit institutions are to be allayed. Loan waivers are at best temporary palliatives to the problems facing rural India. Significant and sustained improvement in the welfare of the rural population is not possible without a faster pace of growth in the rural economy and an improved quality of education and health services. Increased public spending will not achieve this. It is essential to address deeper problems rooted in the overexploitation and degradation of land and water; government
policies that encourage wasteful use of resources; the inefficiency of public systems responsible for implementing programmes, regulating the use of common service facilities, and ensuring quality infrastructural and support services. Regrettably, the powers that be and powers that want to be have rarely been willing to confront and address these difficult and complex problems. The chances that their attitudes will change are far less in the current state of intense and contentious competitive politics. That does not augur well for the future of rural India.
RUPALI ARINDAM MUKHERJEE
loans relating to these dates. The package would offer a 25% rebate to farmers for payment of the balance 75%. Farmers, whose loans were restructured and rescheduled in 2004 and 2006, will also be eligible for benefits of a waiver or one time settlement package. The package implementation is expected to be completed by June 30, this year. But in the meantime, the farmer who gets the assurance for waiving of his loans or who enter into a one-time settlement of loans can avail fresh loans from banks. . The director of the National Centre for Agricultural Economics and Policy Research, PK Joshi, said: “The argument in favour of such a provision was that the majority of farmers, who committed suicide, could not repay their loans. This bonanza will undoubtedly give some relief to roughly 35% of small and marginal farmers and nearly 50% of large farmers; largely confined in favourable environment. Those who are located in underprivileged and marginal areas (especially rainfed and backward) are often deprived of credit from the formal banking sector, such as commercial banks, cooperatives and regional rural banks, will not gain from it. The decision to waive farm loans on an unprecedented scale announced in the Budget has attracted widespread comment. Almost all political parties have welcomed the move. In fact, most of them were vociferously clamouring for such a measure to relieve the farm sector from a “crushing” burden of debt. The Budget speech has announced the decision to waive farm loans and also estimated the cost (Rs. 60,000 crore) that government has to bear. It does not spell out the basis of the estimate nor of the institutions, loan categories, and class of borrowers that will be covered by the scheme. Several aspects need to be clarified: 1. By definition, the scheme can apply only to those who have outstanding loans with institutions. Nearly three-fourths of all rural households and 60 per cent of farm households report that they do not have any outstanding debt. All households with outstanding debt may not have outstanding institutional debt. Thus the large majority of even farmers will not benefit from the waiver. If only farmer loans are eligible, the proportion of beneficiaries will be even smaller. 2. Both access to institutional credit and the proportion of outstanding debt are skewed in favour of larger farms. Cultivator households with less than 2 hectares account for 85 per cent of all
farm households; and report a lower incidence of debt (46 per cent) and of outstanding debt (30 per cent) than the overall average. 3. Institutional loans include direct lending (to meet needs production as well as consumption) and “indirect lending” for allied activities (such as input distribution, trading, transport and processing of farm produce). The latter comprise about half of outstanding loans of cooperatives; 55 per cent in regional rural banks; and a little under half in scheduled commercial banks. There is hardly any justification for waivers on indirect loans. 4. The magnitude of outstanding debt of rural households, going by National Sample Survey (NSS) data, is less than outstanding debt reported by the institutions in the cooperatives and substantially so in regional rural banks. Since both are intended to lend mostly in rural areas, this difference suggests that they also carry a sizeable portfolio of non-household, non-rural loans. 5. The basis of the estimate that the waiver will cost Rs 60, 000 crore is far from clear. There is good reason to believe that a generalised waiver of all overdues will benefit non-rural borrowers to a considerable extent; that the large majority of rural households, including those in the below 2 hectares category will not benefit; and that the magnitude of benefit accruing to them will be considerably less than Rs.60, 000 crore. Benefits in rural areas will accrue to a rather small fraction of households and the magnitude of relief to the beneficiaries is likely to be considerably less than the cited figure. These considerations argue for a close second look at the rationale, scope, and intent of the scheme. But it is also necessary to warn the public of the larger adverse effects of waivers on the rural credit system. Supporters of the scheme argue that this one time relief is a necessary measure to address the current agrarian crisis and that it would enable farmers to restart on a clean state. But this has been said every time in the past when such waivers were announced. Experience shows that waivers encouraged borrowers to presume that they can sooner or later get away without repaying loans. It reinforces the culture of wilful default, which has resulted in huge overdues and defaults in all segments of organised financial institutions. The deterioration in the cooperative credit system is, in large measure, due to the conscious state policy of interference in the grant and recovery of loans.
Cooperatives have by far the greatest reach in terms of accessibility, number of borrowers, and delivery of credit to the rural population. Concerned by their near collapse, the Central government set up a task force to suggest ways to arrest the trend and revive them. The task force suggested radical changes in the legal and institutional framework essential to enable and induce cooperatives to function as autonomous and self-regulating entities. It emphasised the need to eliminate government interference in grant of loans, recovery processes, and waiving of dues from borrowers. The Central government accepted the recommendations. Extensive consultations with States led to a political consensus to accept and implement the reform package. The Central government has committed to provide around Rs. 18,000 crore to clear accumulated losses over a period of time and linked to actual fulfilment of specified conditions. Most States have since given their formal commitment to this effect and agreed to abide by the conditions for availing of Central financial assistance. Supervised implementation is under way and has made significant progress in several States. This programme thus already covers a significant part of what is being attempted in the current waiver scheme. It is ironical that the decision to go for a general waiver comes even as the above reform programme is under way. It obviously goes against the central thrust and spirit of the reform programme. Since the proposed general waiver is wholly underwritten and funded by the Centre, the need for the kind of restructuring and conditionality attached to central assistance is likely to be questioned. Doubts will be raised and pressures will build to dilute or even to override the programme. It is very important that the government clarifies its position on the status of the current reform programme and how such pressures can be contained so that apprehensions about the prospect of much-needed institution reform in cooperative credit institutions are to be allayed. Loan waivers are at best temporary palliatives to the problems facing rural India. Significant and sustained improvement in the welfare of the rural population is not possible without a faster pace of growth in the rural economy and an improved quality of education and health services. Increased public spending will not achieve this. It is essential to address deeper problems rooted in the overexploitation and degradation of land and water; government
policies that encourage wasteful use of resources; the inefficiency of public systems responsible for implementing programmes, regulating the use of common service facilities, and ensuring quality infrastructural and support services. Regrettably, the powers that be and powers that want to be have rarely been willing to confront and address these difficult and complex problems. The chances that their attitudes will change are far less in the current state of intense and contentious competitive politics. That does not augur well for the future of rural India.
RUPALI ARINDAM MUKHERJEE
