Addressing the issue of loan waivers

What is the issue?

Direct income support and improving markets and access for farmers are better ways to address agrarian distress than loan waivers.

What are the concerns?

• Priority Sector Lending is an important role given by the RBI to the banks for providing a specified portion of the bank lending to few specific sectors.
• Total PSL lending from domestic scheduled commercial banks to the agriculture sector should be 18% of their Adjusted Net Bank Credit(ANBC).
• Within the 18% target for agriculture, a target of 8% of ANBC is prescribed for small and Marginal Farmers.
• However, the Reserve Bank data shows that the share of loans of less than Rs.2 lakhs, typically taken by small farmers, accounts for less than 40% of total farm credit.
• About 13% of total agri credit was made up by loans of Rs. 1 crore or more which are availed by owners of warehouses, food processors and manufacturers of fertiliser and farm equipment.
• Thus, powerful interest groups in rural India tend to enjoy the benefits of cheap loans categorised under ‘priority sector’ lending, which are otherwise intended for small and marginal farmers.
• Besides, crop loans disbursed to agriculturists leave out tenant farmers.
• Thus, loan waivers will merely end up aiding big agriculturists, rather than small farmers and tenant farmers. 
• This has made the small and marginal farmers to depend more on informal money lenders, where the interest rates range from 24% to 48%.
• Also, these loan waivers will hit public investments in agriculture adversely and may even worsen farm distress in due course.
• Hence, there is a need for financial inclusion of these small and marginal farmers in institutional credit at reasonable interest rates and not outright loan waivers.

How does the Telangana model serve as an alternate?

• Rythu Bandhu is a support scheme for farmers in Telangana, which provides cheque payments to farmers based on their landholdings.
• Under this scheme Telangana government gives every beneficiary farmer Rs 4,000 per acre as “investment support” before every crop season.
• The scheme covers 1.42 crore acres in the 31 districts of the state, and every farmer owning land is eligible.
• The objective is to help the farmer meet a major part of his expenses on seed, fertiliser, pesticide, and field preparation. (farm inputs)
• The government will issue cheques rather than make direct benefit transfer (DBT) because banks might use the DBT money to adjust against farmers’ previous dues.
• The revenue department overhauled the entire land holding records and issued new Pattadar passbooks for land ownership.
• On the implementation phase, the village revenue officers and agriculture extension officers will keep a tab on whether a farmer who received the subsidy has sowed the crop or not.
• Thus the scheme provides for higher government intervention on farm inputs(seeds/fertilisers) and lower intervention on farm outputs. (no physical procurement and stocking of grains from farmers)
• If a proper demand-supply ratio in markets in ensured, the scheme will reduce the need for MSP itself in the long run.

What should be done?

• Bankers and the Reserve Bank (RBI) have often expressed concern that debt waivers can wreck credit culture.
• The State Bank of India (SBI) Research shows that income support schemes may be a more effective alternative at an all-India level to address rural distress.
• There are 21.6 crore small and marginal farmers in the country and such a scheme is the only way to support the farmers, apart from ensuring market prices for their produce.
• It suggested providing Rs 12,000 per family per year in two instalments, which will entail a total spending of Rs 50,000 crore at the national level.
• Hence, income support scheme should be implemented as an alternate to loan waivers to ensure stability in farm income in the coming years.  

Source: Business Line