Farm Loan Waivers – Are They Effective Instruments: Seminar At Ifmr, Chennai On 6 May 2008

Farm loan waivers – are they effective instruments Seminar at IFMR, Chennai on 6 May 2008 N.Srinivasan

Free Bank of India …..Branch

Hand s up

Don’t be hasty; You can take a Loan; it is just like loot. No Need to repay; We’ll waive it

The budget proposal • Waive all overdue farm loans as on 31 December 2007 of farmers holding upto 5 acres • Offer a settlement with a 25% rebate on overdue loans of other farmers • Total bill of Rs 60000 crores • 40 million farmers to be benefited (average relief of Rs 15000 per farmer) • Banks to give fresh loans post-waiver

Problems of farmers • • • • • •

Stagnant productivity and production Terms of trade not favourable Weather risks, natural calamities Market risks – of unremunerative prices Limited technology solutions Lack of access to inputs - finance Loan defaults are a result – not a cause

Is waiver a solution • A temporary relief to defaulters – but a long-drawn problem for the banks • Severe and persistent moral hazard potential • Credit availability risk for all farmers in future Waiver treats symptoms – not the cause

Test of solutions • • • • •

Fit Equity Food security impact Income impact Future focus

Credit intensity of agri production Year

Credit flow as % agri GDP

1980-81

7.3

1990-91

6.8

2000-01

11.7

2004-05

23.4

2005-06

30.3

2006-07

31

It takes 3 times more credit to generate unit GDP in agriculture compared to 80-81!

Credit as an instrument • Share of agriculture in credit has been constant – share of agri in GDP declining • Improved credit flow has not had any direct impact on production • Interest costs form less than 2% of value of output (Sriram 2007) • At best credit provides liquidity and smoothens consumption and production needs Credit as a vehicle of relief is not “fit” choice

Equity issues • Covers only borrowers from banks • Borrowers are less than 49% • 39% of indebted farm households do not borrrow from banks • Of farmers with less than 2 ha land, 49% borrow from informal sources • 64% of borrowers had debts to informal sector • Better off farmers access bank credit • Disadvantaged areas and vulnerable populations not targeted sharply Many undeserving farmers would benefit – not all deserving would get it. Default is a poor criterion of selection of farmers for state funded relief

States with higher debt incidence State

% of indebted Average debt per farm households farmer household (Rs)

All India

48.4

12585

AP

82

23965

Gujarat

52

15526

Haryana

53

26007

Karnataka

61.4

18135

Kerala

64.4

33097

MP

50.8

14218

Maharashtra

54.8

16973

Punjab

65.4

41576

Rajasthan

52.4

18372

Tamil Nadu

74.5

23963

West Bengal

50.8

5230

Food security • • • •

Food security interests not promoted No targeting of production or productivity Priority crops/areas not targeted Factors influencing crop planning or cultural practices not impacted

Farmer security • Reduction of debt of farmers improves financial condition • But renders continued bank credit flow risky • Future investments in productivity enhancement would be difficult, as long term loans may not be easily available • No direct impact on future incomes

Are we paying enough to farmers Year

Wheat Minimum Support Price (MSP)

Rice World Market Price (WMP)

Minimum Support Price (MSP)

World Market Price (WMP)

1991-92

275

293

343

667

1992-93

330

394

403

695

1993-94

350

443

463

745

1994-95

360

474

508

847

1995-96

380

577

537

1041

1996-97

475

744

567

1198

1997-98

510

588

619

1097

1998-99

550

524

657

1259

1999-2000

580

482

731

1068

2000-2001

610

517

761

908

2001-2002

620

543

791

937

458.16

507.18

580

951

Mean (91-02)

Source Ramesh Chand 2003

Will banks give loans in future? • Post-waiver appetite for farm loans bound to decline among banks (ARDRS experience) • Priority sector norms would compel to some extent • Avoidance of riskier (vulnerable) clients • Shorter term (crop) loans would be preferred • Investment loans might suffer • Growth rates seen in last three years may not happen

Source: Expert group on agricultural indebtedness

Alternatives - 1 • Making farm insurance universal and effective – Making crop insurance compulsory – State to pay the premium for all small farmers – Corpus to provide gap funding on claims – Investment in systems to take unit of coverage to village – Open the scheme to private insurers to expand outreach

Crop insurance-some numbers

2004-05 Farmers covered (Lakh) 162 Acreage (lakh ha) 296 Sum assured (Rs crore) 16844 Premium (Rs crore) 535 Claims paid (Rs crore) 1199

2005-06 167 278 18588 554 1398

2006-07 180 273 21351 600 2245

To cover all farmers in the country the outreach should expand by about five times

Alternatives - 2 • Introduce income insurance scheme for all small farmers as a safety net • Invest in institutions for creation of markets and farmer’s participation in markets • Accelerate financial inclusion initiative • Enable effective redemption of money lender debts • Carry out public investments that improve productivity and incomes • Improve RKVY – XI plan outlay of Rs 25000 crores – compares poorly with outlay on waiver

Thanks for the patience Time for questions