FARM LOAN WAIVER – ISSUES IN

IMPLEMENTATION
The Rs 60,000 cr loan waiver package presented by the Union
finance minister P Chidambaram is now engaging the attention of
the banking sector, economists and policymakers alike. Some
sections have put forward the argument that the relief package may
not really bring too much cheer to some segments of debt-trapped
farmers, particularly poor farmers in the dryland areas and those in
the remote hilly regions of the country.
As per the general definition, a marginal farmer is one who has
holding up to one hectare (2.47 acre) and the small farmer is one
who has holding up to two hectare (5.94 acre). According to the
recent edition of Union agriculture ministry’s Agricultural Statistics
at a Glance, resource poor farmers in dryland areas of Rajasthan
have holding ranging between 54 acre to 175 acre. These lands do
not have any assured irrigation and are entirely dependant on
erratic monsoon rains. Similar are the cases in other parts of the
dryland regions in different states like in Tamil Nadu where the
holding is up to 60 acre, in Haryana, Madhya Pradesh and
Maharashtra up to 54 acre, in Sikkim up to 50 acre, in Uttar Pradesh
up to 45 acre, in Andhra Pradesh between 35 to 54 acre, in Bihar up
to 30 to 45 acre, in Gujarat between 20 to 54 acre, in Haryana up to
54 acre, in Himachal between 30 to 75 acre, in Orissa between 30 to
45 acre.
According to the 2001 Census data, 742.6 million people or 72.2% of
the country’s population live in rural areas and are directly or
indirectly dependant on agriculture. The average annual exponential
growth rate of the population is estimated at 1.95%. Out of the total
population of 742.6 million people, Chidambaram has identified 40
million people as beneficiaries under the Rs 60,000 crore loan
waiver package. All agriculture loans of 30 million small and
marginal farmers that were disbursed by banks till March 31, 2007
and were overdue on December 31, 2007 and remained unpaid till
February 29, 2008 would be waived off. According to government's
estimate, these unpaid loans would aggregate to Rs 50,000 crore.
For another 10 million farmers, the government has decided to offer
a one time settlement package for clearance of their outstanding
loans relating to these dates. The package would offer a 25% rebate
to farmers for payment of the balance 75%.
Farmers, whose loans were restructured and rescheduled in 2004
and 2006, will also be eligible for benefits of a waiver or one time
settlement package. The package implementation is expected to be
completed by June 30, this year. But in the meantime, the farmer
who gets the assurance for waiving of his loans or who enter into a
one-time settlement of loans can avail fresh loans from banks. .
The director of the National Centre for Agricultural Economics and
Policy Research, PK Joshi, said: “The argument in favour of such a
provision was that the majority of farmers, who committed suicide,
could not repay their loans. This bonanza will undoubtedly give
some relief to roughly 35% of small and marginal farmers and nearly
50% of large farmers; largely confined in favourable environment.
Those who are located in underprivileged and marginal areas
(especially rainfed and backward) are often deprived of credit from
the formal banking sector, such as commercial banks, cooperatives
and regional rural banks, will not gain from it.
The decision to waive farm loans on an unprecedented scale
announced in the Budget has attracted widespread comment.
Almost all political parties have welcomed the move. In fact, most
of them were vociferously clamouring for such a measure to relieve
the farm sector from a “crushing” burden of debt. The Budget
speech has announced the decision to waive farm loans and also
estimated the cost (Rs. 60,000 crore) that government has to bear.
It does not spell out the basis of the estimate nor of the institutions,
loan categories, and class of borrowers that will be covered by the
scheme. Several aspects need to be clarified:
1. By definition, the scheme can apply only to those who have
outstanding loans with institutions. Nearly three-fourths of all rural
households and 60 per cent of farm households report that they do
not have any outstanding debt. All households with outstanding debt
may not have outstanding institutional debt. Thus the large majority
of even farmers will not benefit from the waiver. If only farmer loans
are eligible, the proportion of beneficiaries will be even smaller.
2. Both access to institutional credit and the proportion of
outstanding debt are skewed in favour of larger farms. Cultivator
households with less than 2 hectares account for 85 per cent of all
farm households; and report a lower incidence of debt (46 per cent)
and of outstanding debt (30 per cent) than the overall average.
3. Institutional loans include direct lending (to meet needs
production as well as consumption) and “indirect lending” for allied
activities (such as input distribution, trading, transport and
processing of farm produce). The latter comprise about half of
outstanding loans of cooperatives; 55 per cent in regional rural
banks; and a little under half in scheduled commercial banks. There
is hardly any justification for waivers on indirect loans.
4. The magnitude of outstanding debt of rural households, going by
National Sample Survey (NSS) data, is less than outstanding debt
reported by the institutions in the cooperatives and substantially so
in regional rural banks. Since both are intended to lend mostly in
rural areas, this difference suggests that they also carry a sizeable
portfolio of non-household, non-rural loans.
5. The basis of the estimate that the waiver will cost Rs 60, 000
crore is far from clear. There is good reason to believe that a
generalised waiver of all overdues will benefit non-rural borrowers
to a considerable extent; that the large majority of rural households,
including those in the below 2 hectares category will not benefit;
and that the magnitude of benefit accruing to them will be
considerably less than Rs.60, 000 crore. Benefits in rural areas will
accrue to a rather small fraction of households and the magnitude
of relief to the beneficiaries is likely to be considerably less than
the cited figure.
These considerations argue for a close second look at the rationale,
scope, and intent of the scheme. But it is also necessary to warn
the public of the larger adverse effects of waivers on the rural credit
system. Supporters of the scheme argue that this one time relief is
a necessary measure to address the current agrarian crisis and that
it would enable farmers to restart on a clean state. But this has
been said every time in the past when such waivers were
announced. Experience shows that waivers encouraged borrowers
to presume that they can sooner or later get away without repaying
loans. It reinforces the culture of wilful default, which has resulted
in huge overdues and defaults in all segments of organised financial
institutions. The deterioration in the cooperative credit system is, in
large measure, due to the conscious state policy of interference in
the grant and recovery of loans.
Cooperatives have by far the greatest reach in terms of
accessibility, number of borrowers, and delivery of credit to the
rural population. Concerned by their near collapse, the Central
government set up a task force to suggest ways to arrest the trend
and revive them. The task force suggested radical changes in the
legal and institutional framework essential to enable and induce
cooperatives to function as autonomous and self-regulating entities.
It emphasised the need to eliminate government interference in
grant of loans, recovery processes, and waiving of dues from
borrowers.
The Central government accepted the recommendations. Extensive
consultations with States led to a political consensus to accept and
implement the reform package. The Central government has
committed to provide around Rs. 18,000 crore to clear accumulated
losses over a period of time and linked to actual fulfilment of
specified conditions. Most States have since given their formal
commitment to this effect and agreed to abide by the conditions for
availing of Central financial assistance. Supervised implementation
is under way and has made significant progress in several States.
This programme thus already covers a significant part of what is
being attempted in the current waiver scheme.
It is ironical that the decision to go for a general waiver comes even
as the above reform programme is under way. It obviously goes
against the central thrust and spirit of the reform programme. Since
the proposed general waiver is wholly underwritten and funded by
the Centre, the need for the kind of restructuring and conditionality
attached to central assistance is likely to be questioned. Doubts
will be raised and pressures will build to dilute or even to override
the programme. It is very important that the government clarifies its
position on the status of the current reform programme and how
such pressures can be contained so that apprehensions about the
prospect of much-needed institution reform in cooperative credit
institutions are to be allayed.
Loan waivers are at best temporary palliatives to the problems
facing rural India. Significant and sustained improvement in the
welfare of the rural population is not possible without a faster pace
of growth in the rural economy and an improved quality of education
and health services. Increased public spending will not achieve this.
It is essential to address deeper problems rooted in the
overexploitation and degradation of land and water; government
policies that encourage wasteful use of resources; the inefficiency
of public systems responsible for implementing programmes,
regulating the use of common service facilities, and ensuring quality
infrastructural and support services.
Regrettably, the powers that be and powers that want to be have
rarely been willing to confront and address these difficult and
complex problems. The chances that their attitudes will change are
far less in the current state of intense and contentious competitive
politics. That does not augur well for the future of rural India.

RUPALI
ARINDAM MUKHERJEE