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Farmers need safety on their produce, input costs; not loan waivers

While this is seen as a temporary relief for the farm crisis, experts believe farmers will be better off with lower input costs and an ensured safety net on their output produce.

July 13, 2017 / 07:06 PM IST


Two of India's largest states - Uttar Pradesh and Maharashtra - recently announced farm loan waivers to the tune of over Rs 65,000 crore combined.

While this is seen as a temporary relief for the farm crisis, experts believe farmers will be better off with lower input costs and an ensured safety net on their output produce.

"This is a political decision and may have been avoided if the government can give them a better sale price and reduce their costs which they bear before the produce," a senior bank executive told Moneycontrol.

Arvind Sonmale, a former State Bank of India banker and current MD and CEO of SAFL (‎Sustainable Agro-commercial Finance), said: “It (loan waiver) is not desirable and may seem a short-term relief, but farmers will suffer in the long term. After 2008 (the UPA-led central government waived loans worth over Rs 60,000 crore), no banks were willing to give loans to them."

Farm Crisis: Why Bumper Harvests Are Becoming Painful For Indian Farmers


SAFL is a private non-banking finance company lending exclusively to agriculture-infrastructure in Maharashtra, Karnataka and Madhya Pradesh.

Sonmale said that it is preferable to have some kind of safety net or give returns on the produce of the farmers.

"Sometimes, whenever there is a glut in the produce such as tomatoes, onions, grapes which is happening in the protest regions, the waiver money can be used to have a minimum support price during this period and get them a good price for it," he said.

There is also a need to control the input prices of materials such as seeds, fertilisers, pesticides and labour. These can be subsidized, the way urea is right now. There can be government outlets for such subsidies, he added.

“One (government or bank) has to differentiate who is genuinely in difficulty and one who has capability. Farmers don’t stop paying at large levels but some do expect that and hence delay payments. We have to tell them the implications of not paying loans," another large public sector banker said.

Father of India’s green revolution and agriculture scientist MS Swaminathan, in a tweet, said that while loan waivers are needed temporarily, they don't provide secure long-term credit system.

The loan waiver system implies that banks are compensated by the government.

He added that "though there's a bumper crop this year, farmers are dissatisfied with procurement price & unable to repay institutional & private loans."

Farmers stop repayments impacting State finances

Citing the economics of it, experts see this move jeopardizing the states’ financial health and eventually the credit culture that could further restrict further lending to farmers.

Bankers not only lose out on the interest from the date of such an announcement till the actual receipt of the compensation, but also incur additional costs such as overdue charges, allied service charges like inspection or recovery efforts.

In March, Arundhati Bhattacharya, chairman of State Bank of India had said: "Credit discipline breaks when you waive off farm loans. Money will come in today because (the) government will pay but when we will give (a) loan in (the) future, farmers will wait for (the) next elections…Support to the farmers is necessary, but not at the cost of credit discipline."

Bankers now believe that the mood has become such that many capable borrowers want waivers. This increases bankers efforts and makes the recovery task much more difficult thereby leading to more NPAs (non-performing assets) in addition to the existing large bad loans.

Agriculture NPAs for the financial year 2016 stood at 6-10 percent for PSU banks. As on March 2017, the total agriculture loans across states in India stood at Rs 953,900 crore.

“About 2/3rd of the agriculture debt of this Rs 9.5 lakh crore is in states where a debt waiver has been announced or promised, or in states that will go to the polls in the next two years. With expectations of a waiver now increasing in other states, there is a possibility of agri stress increasing elsewhere, especially poll-bound states," Japanese brokerage Nomura said in a report.


Loan waivers: Temporary tool, affects economics

A week before the announcement, Maharashtra's chief minister Devendra Fadnavis had announced loan waiver for marginal farmers, but had ruled out a blanket waiver on the grounds that it would cost the government "an unaffordable Rs 1.14 lakh crore".

In the past 10 years, Maharashtra’s debt stock has surged from Rs 1.6 lakh crore in 2008-09 to Rs 3.71 lakh crore in 2016-17. For the year 2017-18, it was estimated to be at Rs 4.13 lakh crore, which will further rise with the farm loan waiver.

In April, the newly formed government in Uttar Pradesh, country’s most populous state led by Bharatiya Janta Party’s Yogi Adityanath, also announced a farm waiver of Rs 36,300 crore, fulfilling a promise made to the farmers before elections.

Earlier this month, the Reserve Bank of India (RBI) Governor Urjit Patel in the policy announcement said: "The risk of fiscal slippages which by and large can entail inflation spillovers has risen with the announcements of the large farm loan waivers. There is a risk that unless there is existing fiscal space in State Governments’ Budget or some space is found, the likelihood of going down the slippery path and dissipating the important gains that we have made in the fiscal rectitude over the last 2-3 years can come about.

“And past episodes in our country have shown that when there are significant fiscal slippages, they do permeate through to inflation sooner or later. So it’s a path we need to tread very carefully before it gets out of hand.”
Beena Parmar
first published: Jun 14, 2017 10:11 pm

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