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Opinion | Farm loan waivers are bad for the economy, for banks - and for farmers

Data now shows that this elixir of political survival is causing structural damage and needs to be stopped before it becomes irreversible.

July 25, 2018 / 04:50 PM IST
Farmers | The government also announced Rashtriya Kamdhenu Aayog, a scheme to enhance the productivity of cows.

Farmers | The government also announced Rashtriya Kamdhenu Aayog, a scheme to enhance the productivity of cows.

One might be forgiven for believing that politicians pray for a bad monsoon ahead of election years so that they can dole out loan waivers. Problem is, freebies may look altruistic but are doing more damage than good for the economy in general and farmers in particular.

Loan waivers were a creation of a shrewd mind. Rather than using party funds to give away freebies and garner votes, politicians devised the loan waiver, at a cost to the exchequer (eventually, you and me). Ironically, this cleverly devised scheme was introduced during the tenure of economist-turned-Prime Minister Manmohan Singh, who used it in 2008 to come back to power. Since then it has become a template that is used by all political parties to capture rural votes.

As a matter of fact, the first loan waiver was actually in 1990, when then PM Rajiv Gandhi was arm-twisted by a group of sugarcane farmers from Uttar Pradesh, who sat on a dharna in Delhi demanding the waiver. Since this was forced on an unwilling government, it was not really vote-bank politics.

Of late the loan-waiver-for-vote game has been played successfully in Andhra Pradesh and Telangana in 2014, Tamil Nadu in 2016 and since then almost every prominent state that went in for elections has used this strategy. In Gujarat, the ruling BJP did not, and almost lost. This duly frightened other prominent BJP-ruled states to declare a loan waiver even without an election in sight.

However, data now shows that this elixir of political survival is causing structural damage and needs to be stopped before it becomes irreversible.

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Reports show that credit offtake by farmers has fallen in states that have given loan waivers, due largely to a deterioration in farmers’ credit scores. A Business Standard report says, quoting RBI data, that credit growth to agriculture was the slowest in almost a decade. Maharashtra, which saw farmers walking 180 km ‘demanding’ a waiver, has seen the worst growth. Against a target of Rs 54,200 crore, banks in the state have disbursed only Rs 25,300 crore or 47 percent of the targeted amount.

Waivers spoil the credit discipline in the system, which again got captured in RBI data. An RBI research paper showed that loan performance of distressed borrowers who were given waivers improved in subsequent years by 16-20 percent, but that of timely repayers fell by 11 percent. The honest farmer sees the benefit of turning into a defaulter.

Though farm loans going bad still account for only 6 percent of banks’ defaults as compared to 20.83 percent for the corporate sector, what doesn’t show up is the loans taken from moneylenders or shopkeepers.

Those who have been taken a waiver are on the blacklist of the banks with a sharp drop in their credit score, and have to go through the non-banking route to fund their operations for a few more years.

RBI governors have been warning the government on the danger of loan waivers. Raghuram Rajan, when he was RBI’s governor, said categorically that the central bank found loan waivers to be ineffective. They have constrained the credit flow post-waiver to the farmers, he added. He hit the nail on the head when he said that the cheap credit from the agriculture is diverted to other use. That to some extent the growth in the rural economy despite farmers crying over crop failure or low prices.

Current RBI governor Urjit Patel has noted that the lending institutions, be it formal or informal, are the first to be hit. Apart from the direct impact of taking a hit in their books, there is also a delay on the part of the government in disbursing the waivers which hurts the books further.

RBI in its annual report has also said that states offering farm loan waivers may face a delay in achieving lower fiscal deficit targets.

There is little hope that any political party in an election year would be willing to look at the economy and the damage loan waivers are causing to the farm sector and the economy. Hopefully when the dust settles the next government would realize the damage the political class have collectively caused to the rural economy.
Shishir Asthana
first published: Jun 27, 2018 06:40 pm

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