SBI chairperson Arundhati Bhattacharya’s impromptu remarks on loan waiver promises of the States to the farmers have attracted politicians’ ire. Equity and discipline are two sides of the coin of farm lending. If banks maintain equity and care for lending discipline, borrower discipline would not take a toll.
Loan waivers announced by State governments should be met by their exchequers and not the Centre, Union Minister Venkaiah Naidu had said. But when the BJP announced it, decrying the earlier moves of AP and Telangana governments, it gained political traction. States such Maharashtra, Tamil Nadu and Karnataka joined the chorus in demanding a cake in the bargain from the Centre. The Telangana government said it would reiterate its demand for reimbursement of the waived amount from the Centre.
Have farm loans become unviable and farmers untrustworthy borrowers? Are there no alternatives to rescue the farmers from this?
Unfortunately, lending discipline is lax. Roll over of crop loan with interest as a new loan (we call this book adjustment) and a small incremental credit for crops, which take more loan component than that is actually grown on the field, has become the order of the day.
In the South, it is the gold loans that get accounted for as crop loans. Otherwise, one cannot find an explanation for only 20.9% of crop loans in Telangana getting insurance cover against the mandatory debit of premium for all the crop loans disbursed.
Some grameen banks are debiting processing fee and inspection charges on crop loans and that too without the borrowers’ knowledge, contrary to the RBI instructions. Moreover, they charge interest on these debits if unable to recover them.
Armchair lending even for the farm sector has become the norm due to a shortage of field staff. Earlier, authorities and even top management visited the adopted villages as a semblance of identifying with the rural credit activity. Such visits are rare now. These are not wild allegations but facts that came out during the crop loan waiver evaluation done in Telangana by the Development and Research Services Private Limited (DRS).
Farmers did not fail the nation in spite of the failure of monsoons, failure of governments in not releasing the promised incentives in time, insurance failing them year after year and markets ditching them on the price front. But bankers failed the farmer and the nation with absolute impunity. Any crop loan target set for them by the government is shown to be achieved.
The Rs 10,000-crore loan write-offs of 1990 and Rs 70,000 crore of 2008 were a political stroke and criticised for lax implementation by the CAG.
TS Waiver Scheme
The Telangana government’s waiver scheme covers only institutional crop loans, including gold loans outstanding as on March 31, 2014, up to Rs 1 lakh per farmer family, spouse and dependent children. The claims are reimbursed by the government on the basis of a certificate from the bank that the waived amount has actually been credited to the farmer’s account.
Every lending institution is mandatorily responsible for the correctness and integrity of the list of eligible farmers under the scheme and the particulars of loan waiver in respect of each farmer. Bankers are expected to provide fresh loans. With the last instalment getting released during the year, the total loan write-off by the government has reached Rs 16,060 crore.
The evaluation exercise revealed that the farmers are mostly happy with the reprieve, particularly because they were affected by severe drought for two years in a row, though they were unhappy that the waiver instalments were released late leading to a delay in fresh crop loans by banks. Fresh crop loans were inordinately delayed in 60-70 percent of the cases during 2014.
The crop sector accounted for 55.5% of the total agriculture loans. Over 80 percent of small and marginal farmers had taken loans from multiple institutions, including from private lenders and traders. The State, therefore, faced problems in addressing the competing demands on the claims for a waiver.
The loan books of banks and the land record passbooks of farmers proved equally non-transparent. Borrowers, as well as their parents with identical names figuring in different banks, posed impregnable identification issues requiring over six months for resolution at the sub-district level before the first instalment was released.
The average loan waiver amount was around Rs 55,000 per farmer family as against the announced Rs 1 lakh. As a result, major public sector banks had gross NPAs in short-term crop loans of 2.4% in 2016 as against nearly 8% in 2015.
South Korean Example
The DRS study came to the conclusion that loan waivers are not a permanent solution to the recurring problems of the farmers either due to man-made or natural calamities. Appropriate insurance mechanisms are the right solution. The latest PMJBY (Pradhan Mantri Jivanjyoti Bima Yojna) based on threshold yields of five years for the area is unsuitable for drought-prone Telangana.
South Korea, which supports its agriculture sector ranking top among the world’s highest subsidy providers, offers an excellent example in this direction.
Korean farmers also get the benefit of a comprehensive agricultural insurance scheme managed by the National Agricultural Cooperative Federation (NACF) with reinsurance support on a quota share basis from a group of domestic reinsurers. The government supports the scheme in four different ways: i) provides 50 percent premium subsidies for crops and livestock; ii) acts as a reinsurer of last resort for the liability in excess of 180 percent local market loss ratio;(iii) 100 percent of the NACF’s crop insurance operational expenses and 50 percent of livestock insurance operational expenses are subsidised by the federal government budget; and (iv) it participates in product research and development. The insurance coverage in Korea is voluntary.
It will be a worthwhile investment on the part of the government both in terms of time and resources to provide sustainable income insurance to farmers on a pan-India platform on similar lines so that the recurring demand for loan write-offs can be warded off.
(The author is an economist and risk management specialist. He is part of the DRS Study Team)