Credit Policy and Loan Waivers

What is the issue?

There have been instances of states rolling out farm waiver schemes and the demand for further waivers continues.
It is crucial at this juncture to assess the farmers' credit policy, especially in terms of outreach of banks and financial inclusion.

What are the government's initiatives?

One of the prime objectives of India’s agricultural policy has been to improve farmers’ access to institutional credit.
This is to reduce farmers’ dependence on informal sources of credit with exorbitant interest rates.
The government has thus improved the flow of adequate credit through the nationalisation of commercial banks.
And further with the establishment of Regional Rural Banks and the National Bank for Agriculture and Rural Development.
It has also launched various farm credit programmes over the years such as -

As a result of all these varied initiatives, the share of institutional credit to agricultural gross domestic product has increased.
However, in absolute terms, there are still a large number of farmers for whom formal sources of credit are inaccessible.

Why formal credit?

Studies highlight that institutional borrowers earn a much higher net return from farming per hectare than the non-institutional borrowers.
Similarly, access to institutional credit is associated with higher per capita monthly consumption expenditures(in other words, income)
Access to formal credit becomes important in reducing poverty, given the large proportion of landless, marginal, small farmers and poor farm households.
Formal credit also tends to enhance farmers’ risk-bearing ability to take up risky ventures and investments in agriculture that could yield higher incomes.
Besides, at the global level, studies indicate that access to formal credit contributes to an increase in agricultural productivity and household income.
However, such links have not been well documented in India.

What is the concern with loan waivers?

Going by the statistics, there is a large proportion of marginal, small farmers who are still out of the formal credit institutions.
They remain outside the ambit of the policy of a subsidised rate of interest and resultantly the loan waiver schemes.
Clearly, loan waivers would be a relief to the relatively better off and the lesser-in-number medium and large farmers.
This is doubtful of making any significant impact on their income and consumption.
Thus, would providing loans to farmers at a subsidised rate of interest or their waiver result in over all farmers’ welfare is still uncertain.
Loan waivers could provide a temporary relief from debt but may not contribute to bringing farmers out of indebtedness and distress, in the long term.
A diversion of money towards debt relief, which is in fact unproductive, will adversely impinge on state finances.
Besides, the challenge of identifying eligible beneficiaries and distributing the amount exists.

What should be done?

The credit market should be expanded to include agricultural labourers, marginal and small land holders as well.
It is essential to revisit the credit policy with a focus on the outreach of banks and financial inclusion.
Government should also make efforts to protect farmers from incessant natural disasters and price volatility through crop insurance and better marketing systems.

Source: The Hindu