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Loan waivers encourage payment defaults PDF Print E-mail
Wednesday, 14 March 2018 06:28
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Shobhana edit

Farmers in Maharashtra may have called off their stir after having been reassured by chief minister Devendra Fadnavis that crop loans, taken up to June 2017, will be waived. The chief minister has also agreed to look into claims of tribal farmers who are demanding ownership of the land they till as guaranteed by the Forest Rights Act passed by the United Progressive Alliance (UPA). Loan waivers can, at best, be temporary solutions; the distress in the agriculture sector, whether relating to prices or more equitable and profitable lending, needs closer attention. Indeed, given how the sector is in pain despite record harvests as farmers don’t get the best price for their crop, the absence of a coherent strategy is apparent. When small farmers say they aren’t getting access to bank loans, they are probably right; a branch manager is more likely to lend to a more prosperous farmer with a bigger plot of land that can be used as collateral. At the end of March 2012, loans outstanding to 1.6 crore smaller farmers—with land of up to 2.5 acres—were of the order of Rs 1.24 lakh crore. Compared with this, the outstanding loans to 96,45,000 farmers, with land of over five acres, were Rs 1.41 lakh crore.

Had smaller farmers had better access to formal finance—and not been at the mercy of usurious moneylenders—they would surely have been better off. But, while much of the non-performing assets (NPAs) for the sector—Rs 60,200 crore at the end of March 2017, or 8.3% of the total NPAs—may be due to genuine reasons such as a crop failure in a drought year, there are defaulters too. Indeed, it is not as though all the loan money has been put to good and productive use. That some of this money—loaned at a soft interest rate, thanks to the interest subsidy provided by the government—is often re-cycled as a loan at a higher interest rate isn’t exactly a secret. At a broader level, therefore, several structural changes need to be made for agricultural lending to become more equitable. Primarily, land holdings need to be larger, not merely because it would make the farmer eligible for a loan, but also because it would make farming far more efficient.

However, since that doesn’t look likely for a long time, the government—the Centre and the states—must work on ways to address the problem in other ways. Better irrigation facilities apart, what is also critical is better market-linkage, with state governments setting up smaller markets so that farmers don’t need to trudge to the large mandis; the eNAM too must become bigger. In the meantime, the government should allow bankers to determine the pricing on loans to ensure the loans are not diverted for purposes other than farming. Indeed, private sector banks are able to lend profitably in rural India because they are allowed to make commercial decisions.

Bankers say the perception created, partly by politicians, that it is the government and not a commercial bank that is sanctioning the loans has also hurt the loan environment. Once a loan is waived, it is virtually impossible for banks to instill any sense of discipline in borrowers; those that were disciplined feel they have been cheated and this ends up ruining the loan environment altogether.

 

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