A loan waiver mania is sweeping the nation. It started with the Uttar Pradesh government announcing a waiver of farm loans of over Rs. 36,000 crore followed by Maharashtra doing its bit to waive off Rs. 30,000 crore, more under duress rather than as a thought through policy measure. Now, as demands rise from other States, the situation is getting ugly with violent protests and police action that has led to the death of at least six farmers in Madhya Pradesh. The pressure is high and more waivers may be on the way.
The response to the loan waivers has been along predictable lines. A loan, after all, is meant to be paid back and the indiscipline of waiving the outstanding leads to more such expectations; every new loan is now taken with the hope (if not an expectation) that it will not have to be paid back. This is how the loan waiver drama plays out again and again, the inevitable flavour of almost every election season.
So no one can fault the plain and simple argument put up by the RBI Governor Dr. Urjit Patel that “waivers engender a moral hazard.” As he put it, “Waivers undermine an honest credit culture…it leads to crowding-out of private borrowers as high government borrowing tends to (impose) an increasing cost of borrowing for others.” He also warned that waivers “could eventually affect the national balance sheet.” The largest bank, the State Bank of India, has echoed the sentiment.
The bankers’ view stands in contrast to the ground reality of the acute distress faced by the farmers. One is about the books and the balance sheet and the other is a pressing (if recurring) grass roots distress that demands immediate attention. If this cycle is to be broken, we must first and foremost accept that the average Indian farmer continues to bear the burden of uncertain monsoons, exploitation by middlemen, poor infrastructure and a banking system that is not particularly good at financial inclusion. India’s growth story may have brought connectivity, satellite television and trendy consumption items to the hinterland but growth has not improved infrastructure, irrigation or any of the inputs that can give a boost to agriculture, on which 50 per cent of the population even now depends for a livelihood.
Some simple figures point to the extent of the problem: The National Sample Survey (NSS) 70th round reported last year that about 86 per cent of the agricultural households in rural India have land less than two hectares, almost 70 per cent of them with less than one hectare. Only 0.4 per cent of the agricultural households possessed land of 10 hectares or more. These results underline the fact that India is a country of marginal and small agricultural households, who are also the most vulnerable to adverse climatic conditions and also cannot access institutional credit. The share of institutional loans increases only with increase in the size of land possessed. For the agricultural households with less than 0.01 hectares of land, only about 15 per cent of the outstanding loans were from institutional sources (government, co-operative society, bank), whereas the share was about 79 per cent for the households with over 10 hectares of land.
This indicates that loan waivers address the concerns of the better off among the farmer community, a subsidy that is eventually at the cost of the majority of marginal farmers who have to fend for themselves and will get no relief from the money lenders. That is one part of the problem of waivers, and an illustration of the fact that subsidies are often cornered by those who are in a position strong enough at least to exert a claim. Those further down the ladder remain unseen and unheard; the problem of burning discontent is therefore only the tip of the iceberg, as it were.
Further, only 23.32 per cent of the gross cropped area was insured in 2014-15, according to the department of agriculture, cooperation and farmers’ welfare. The NSS 70th round reported that a “majority of the agricultural households did not insure their crop due to reasons that can be attributed to lack of awareness, improper coverage and reach, complicated procedures and lack of resources etc..”
These are indicators of a larger agri sector problem that needs to be addressed fast. On the one hand, businesses are looking to expand faster into the heart of rural India and push their wares – shampoos, sodas and breakfast cereals – as aspirational consumption items but if incomes don’t rise, this economy will only drain the poor of what little wherewithal they may have.
In the meanwhile, what could be a way of the concern on repeated loan waivers? There are three types of loans given to farmers – Direct Agricultural Loan, Short Term Production Loan and Investment Loan. Of these, the Direct Agricultural Loans are more vulnerable as these loans are generic in nature while the Short Term Production Loans for raising crops and Investment Loans for replacement, maintenance and capital investment to increase the output are purpose-specific. In order to prevent the default rates, due diligence should be followed in granting the Direct Agricultural Loans. Second, the natural tendency of a gap filling approach to meet the target of priority sector lending should be avoided. Third, the end-use of loans disbursed should be monitored. This is challenging but offers the opportunity for the entire institutional framework (banks, RBI, Central and State governments) to work together to address the issues of farmer loans during the entire process beginning from sanction to loan repayment. It not only keeps vigil but helps understand the dynamics better and creates a culture of financial discipline. Since agriculture is constitutionally a State subject, active participation of state government at each stage of agricultural credit assumes critical importance.
Credit is a cycle comprising allocation, disbursement, utilisation and repayment. Evidence suggests that the small borrowers are not willful defaulters like the large borrowers. Today the burden on the banking sectors is at a much higher level due to the large borrowers and these borrowers are protected in some form or the other. Let us not forget that the small borrowers are defaulters due to factors beyond their control.
R K Pattnaik is Professor, SPJIMR. Jagdish Rattanani is Editor, SPJIMR