What is the issue?
- Farm loan waivers have been a popular political instrument with governments to address agrarian stress temporarily.
- While this is bad economics, a significant part of such loan waivers also don’t actually benefit the needy farmers, which is a cause for caution.
What are recent trends in this context?
- Many states, including “Punjab, Uttar Pradesh, Maharashtra and Karnataka have implemented packages for loan write-offs.
- As farm loan waivers are a preferred “political” answer to farm distress, more populist announcements are likely in the run-up to 2019 elections.
- While farm loan waiver is not a solution to agrarian distress, it is an effective immediate painkiller before the long process of “repair” can commence.
- But with most governments see it merely as an electoral tool with little vision further to address the larger crisis in hand.
What are the concerns with this trend?
- A majority of farmers do not take loans from banks and it is often the comparatively better-off farmers who are able to access bank credit.
- All bank loans are supposed to be insured under various insurance schemes, implying crop failures shouldn’t necessarily concern the borrowers.
- Therefore, theoretically, loss due to natural calamities should be taken care of by insurance, but this isn’t the case, which is absurd.
- Notably, the 12 largest corporate defaulters listed by RBI, owe the banks a total sum of over Rs 2.5 lakh crore, which is only a small portion of the NPAs.
- In comparison, the total farm loan write off (due to crop failures) in the country in 2009 was a significant Rs 52,000 crore.
What do the numbers in Punjab’s loan waiver scheme say?
- The new government in Punjab announced a farm loan waiver immediately on assuming office.
- When they got around to analysing the portfolio of loans, they stumbled upon some inconvenient details.
- Punjab has about 1 crore acres of cultivated land and the short-term credit required per season at the recommended rate of Rs. 22,000 per acre.
- On this base, it is estimated that Rs. 22,000 crore is needed, whereas the crop loans outstanding of all banks were around `63,000 crore.
- While there are around 20 lakh farmers in the state, all banks together have issued 40 lakh Kisan Credit Cards.
- Farmers would need money for other purposes like education of children etc, but that doesn’t justify disproportionate agricultural loans.
What is the way ahead?
- Successive Union finance ministers have been announcing increased targets for short-term agricultural credit in their budget speeches.
- Hence, many banks, under pressure to perform, find the easy way out by giving larger than required amounts based on land as collateral.
- While a detailed bank-wise data is not available, anecdotal evidence suggests that some banks are “better” at this ‘fixing’ than others.
- Considering these issues, it is high time that the RBI and central government scrutinise the profile of agro-loans being doled out to weed out proxies.
Source: Financial Express
