Banking Central: Another farm loan waiver, another jolt to the taxpayer

Last week, the Tamil Nadu government announced a Rs 12,110 crore farm loan waiver for 16.43 lakh farmers who borrowed from co-operative banks. Chief Minister K Palaniswami, while making the announcement in the state assembly, promised to implement the scheme with immediate effect and said the required financial allocation would be made by his government. This becomes the latest farm loan waiver announcement.

Over the years, and specifically, since the Rs 70,000-crore mega loan waiver by the UPA Government in 2008, politicians have increasingly used farm loan waivers as an easy poll plank to lure voters. There are several such in the list including waivers announced by Maharashtra, Uttar Pradesh, Punjab, Karnataka. In the last decade, loan waivers worth Rs 4.7 lakh crore have been announced by different governments, according to an SBI research report last year. The actual amount will be even bigger if one includes the recent waiver announcements such as the one announced by Tamil Nadu.

A loan waiver simply means the ruling government asking the banks to waive or write off the loans of a large number of borrowers in one go. The government then promises to compensate the banks from its own coffers for the amount that gets waived off. Farm loan waiver is an easy tool; a promise by the politician to the farmer that their loans will be written off in exchange of votes; who wouldn’t like the idea of freebies? The winning politician then uses taxpayers’ money to repay these loans to banks, thus straining fiscal positions of state governments. What is the damage caused by the loan waivers? It immediately takes a toll on the credit discipline of a large section of borrowers. Once the waiver is announced even the honest borrowers stop repayments to banks resulting in a spike in overall bad loans.

Do waivers really help the farmer? No. If that was the case, there wouldn’t have been repeated loan waiver announcements in every year. Empirical evidence shows that farm loan waivers have largely failed to cause any meaningful improvement in the lives of farmers on the field. Despite several rounds of loan waivers by different parties, there is no respite for the farmer in the agriculture distress stories in the country.

This is because the benefit of the farm loan waivers does not often reach the needy farmer. The small, landless farmer hardly relies on the formal banking system and often approaches unorganised moneylenders to secure credit. Several studies also point to the fact that the rich farmers with large landholdings often grab the benefit of farm loan waivers while those with tiny landholdings and no political clout get no real benefit. This is why the number of farmer suicides still continues to be at a high level. But remember these figures are only reported suicides. Banks will hesitate to lend further in areas where loan waivers were announced because credit culture takes a big hit.

Banks do not get money on time from governments, this puts them on a back foot, forcing them to go slow on further lending to farmers. Even if banks get the money from the governments, who bears the ultimate burden? Of course, the common taxpayer. The cost of every farm loan waiver is borne by the taxpayer ultimately. The farm loan waivers may have another far-reaching impact. Eventually, other categories of borrowers could also lobby with the governments and seek similar waivers further deepening the mess. This will further vitiate the credit discipline.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)