The fastest-growing major economy of the world cannot ignore its farmers as there is a genuine need to help the farming sector which is suffering from stress on account of indebtedness. The banking industry is also not able to extend credit to those farmers who are in default. A loan waiver can help bankers to renew the loans, and farmers can use the borrowed money for production of more crops, hopefully manifold than the amount of the loan waiver. In fact, a loan waiver can actually benefit the economy, but not in the way it is fashioned now. The analysis needs more depth. India has a history of loan waivers and farm loans have been waived off by different political parties in different parts of the country. Loan waivers not only erode credit discipline of the agricultural sector, but also in other sectors across the country. There are documented studies to show that willingness, and not the ability, has contributed to increasing delinquencies after loan waivers, and banks took nearly a decade to recover from the loan waiver of Rs10,000 crore given by the VP Singh government in 1990. Thus, loan waivers need to be carefully crafted.
There is a need to examine this critical issue from the farmer’s perspective. It has to be recognised that awareness and coverage of crop insurance is grossly inadequate. Also, given the life-cycle and shelf life of crops, in the absence of warehouses and agro-processing units, price and market insurance is completely absent. Thus, supply gluts take place and farmers are forced to destroy their crops many a times. Loan defaults by farmers, starting much before a loan waiver, impact the credit history of a farmer, apart from the fact that access to new loans is not available. Further, as institutional lenders withdraw from the area, after a loan waiver, borrowers are pushed to high-cost unorganised channels, like moneylenders. The withdrawal of public sector banks from tractor financing is an exemplary illustration. Therefore, neither loan default nor loan waiver is a celebratory event in the life of a farmer.
Should only farmers be blamed? The extension of credit in rural area was pushed in a concerted manner from 1978 under the Integrated Rural Development Programme. This programme was pursued vigorously with many instances where bankers pushed credit in the rural sector without understanding rural background and context. A famous illustration is providing cattle loans in areas where the availability of fodder and marketing of milk was a challenge.
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It needs to be recognised that credit schemes for agriculture are not scientifically designed. In view of natural forces, agriculture is more vulnerable to weather, and in the absence of well-developed insurance, farmers are prone to uncovered risk. The markets for final output are also not secure, with minimum support price effectively restricted to two crops—paddy and wheat—and in a few states, mainly Punjab and Haryana. Generally, in the rest of India, farmers are vulnerable to price risk and market uncertainty.
Agriculture loan, like industrial loan, is strictly a banking issue. Fiscal authorities should, preferably, avoid interfering into day-to-day banking business, be it industrial or agricultural banking. Because when political parties interfere with banking policy, fiscal deficit of states would eventually increase. Sooner, rather than later, higher fiscal deficit of states will reflect in high cost of borrowings due to lower credit ratings. In most cases, fiscal burden of states gets transmitted to the central government and to the banking sector where loans are restructured by states or state agencies. The Centre also attempts to support state finances by liberal loans or grants and loss-making banks by recapitalisation. The bulging fiscal deficit of the Centre reflects on international ratings of India, making loans expensive for the Indian industry. The monetary authority, debt manager of the government, is under pressure to raise resources from the markets, mainly commercial banks, at low rates of interest. So, the financial system gets distorted in a maze of adjustments. Hence, it would be in economic interest of the country that banking business be left to banking experts. The participation of fiscal authorities can lead to competitive populism, which only harms economic interests of every citizen.
So, how to help de-stress farmers? There are different ways to de-stress the rural sector. First, ensure crop insurance penetration across the country. Second, extend reach of minimum support price, which has, for too long, been dedicated to few crops and in a narrow geographical area. Third, difficult though, the agro-processing industry and warehousing needs to expand so that agricultural produce can be stored when prices plunge. Fourth, credit products for agriculture need to be tailor-made based on cropping and rain cycle, specific to a particular region. The regional offices of commercial banks should contribute in this exercise. Finally, the period of crop loan should be extendable to four years, given that, on average, every second or third year the spatial distribution of rain pattern is erratic in India.
Further, it would be useful to treat farm loans in a similar way as loans to industry. As the banking sector extends provision of restructuring and one-time settlement to industry, so should farm loans have access to similar schemes. Also, to ensure that credit discipline is not eroded, by announcing a general loan waiver, there is a need to announce a specific, region and crop-based scheme of loan concessions and one-time settlement, in a more responsible way.
Finally, a banking system vulnerable to regular loan waivers because of political reasons cannot be considered robust and capable for providing resources for a high-growth economy. We have to institutionalise a mechanism, with a regulatory authority supervising the scheme of de-stressing farm loans, based on a scientific basis for calculating stressed assets and restructuring them—a decision that should be strictly based on commercial considerations. If not on such occasions, when would the expertise residing in the National Bank for Agriculture and Rural Development be put to use?