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Waiver of Farm Loans Could Lead to More Chaos

Thu, 15 Jun Pre-Open

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It would be simplistic to say it is a domino effect of the loan write-offs for small and marginal farmers by the Uttar Pradesh government, but farmers in different parts of the country have begun agitating for waivers.

Expectation of loan waiver has prompted farmers across states to stop repayment of money owed to financial institutions.

Not long ago, State Bank of India chairperson Arundhati Bhattacharya said that if such waivers are doled out it would disrupt the credit discipline among farmers across the country as they will also expect their loans to be waived and they will stop paying.

Farm loan waivers impact public sector banks the most due to their high exposure to agriculture and farmer loans. Greater share of PSU banks in farm credit, which are considered quasi-government, increases the risk of moral hazard.

As per Livemint, Maharashtra has nearly Rs 4.2 trillion agriculture loans (23% of loans) and Rs 1.2 trillion farm loans (7% of loans) with PSU banks holding nearly 52% of total farm loans, followed by co-operative banks (32%) and private banks (12%).

RBI governor Urjit Patel also had voiced concern earlier about how such loan write-offs undermine an honest credit culture and lead ultimately to a higher cost of borrowing for other borrowers.

Besides that, the larger worry is of the fiscal health of state governments or their finances. That's because the write-offs will not be funded or supported by the central government, as Finance Minister Arun Jaitley said on Monday, although Prime Minister Narendra Modi had made an announcement earlier in the run-up to the polls in Uttar Pradesh in favor of farm loan waivers.

It will mean that each state will then have to find the resources or money to fulfil such promises, which in turn means higher borrowings and perhaps lower spending on development or infrastructure.

Loan waivers always play out their counter-productive effects on the economy, inflating NPAs and battering the bottom-lines of India's public-sector banks, which held Rs 6.4 trillion in bad assets as of March 2017, adding to taxpayer outgo and widening the fiscal deficit.

As per an article in The Hindu, the new cattle trade rules threaten the viability of livestock and dairy farming. While, banks are awash with funds since the note ban, but rural lending growth collapsed to 2.5% in the second half of 2016-17. Also, prices of fuel used by rural households have surged for three successive months. It is this squeeze on several fronts that seems to have pushed farmers to the brink.

The government needs to understand the larger issues, as it has been proven time and again that we are ill-equipped to handle both low and surplus production by farmers. The government needs to think beyond farm loan waivers, as that is only a short-term solution to the problem.

Labour and land reforms also need to be revisited to create more opportunities beyond farming, and irrigation and other infrastructure projects speeded up to boost farm productivity.

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