Agriculture loan waiver is actually hurting farmers

The government’s move to appease small farmers could actually hurt its electoral chances two years after.

Ironically, when P Chidambaram, as Union Finance Minister, announced in February 2008, his government’s decision to write off loans of farmers to the tune of around Rs60,000 crore, it was hailed as ‘a historic decision’.

The loan waiver was expected to cover some 4 crore farmers. Today, that decision could be posing problems for the very farmers it was supposed to protect.

During the three years that have passed since then, there is a great sense of unease in the banking sector.

Few banks are now willing to grant loans to small agriculturists. Earlier, such fears were mostly conjecture.  But recent figures available from the Reserve Bank of India indicate more forcefully that this could soon become a major problem for both small farmers on the one hand, and the banking community on the other.

In fact, this is the second time since Independence that the government in power actually succeeded in eroding the creditworthiness of the most creditworthy segment of India’s population - namely, the rural folk with small and marginal incomes.

This is the community that treated debt as something that had to be repaid, even by the surviving relatives of the borrower after the borrower died. Even thinking of not repaying family debt was considered dishonourable and disreputable.

The government, however, encouraged the erosion of such values when it announced the loan melas in the 1980s.  Even then, loans to the rural sector began drying up, and it took banks almost two decades to gain confidence that the rural sector was worth lending to.  In 2008, such fears were revived, and with good reason.

Total outstanding suddenly began shooting up, first by 12 % by March 2009 and then by a whopping 26% by March 2010. Total number of accounts also soared from 382 lakh accounts in 2007-08 to 428 lakh by 2009-10.

What is even more interesting is that instead of small and marginal in rural areas picking up these loans, more and more money began being sourced through urban and semi urban centres.

As against 85% of the loans being sourced from rural banks in rural areas in 1990, by March 2010 only 66% of agricultural loans were being sourced through such branches.

Instead, agricultural credit from purely urban centres began witnessing a surge. As against 4% of such loans being sourced from purely urban centres in 1990, 2009-10 saw the share of agricultural loans soaring to 16%. Clearly more agricultural loans were being sourced from cities rather than from villages.

There could be two explanations for this. First, as was the case in 2009, stung by the government’s decision to writeoff loans of small farmers, most banks preferred to derisk their loans and lend instead to micro-finance institutions (MFIs) which in turn lent money to small and marginal income rural folk at significantly higher rates of interest.

MFIs too saw rural loans as being inherently risky, given the government irreverence to normal lending practices and protocols.  And higher risk invariably results in higher interest rates.

The banning of MFIs has now made many banks opt for lending to agencies which in turn extend credit to the agricultural sectors. 

These could be large retailers of agricultural products - like food marts — or they could be warehousing companies which in turn could become major lenders to small and large farmers in exchange for the produce they store in these warehouses.

The government’s inability to promote more warehouses (under the Warehousing Development Regulations Act), and the state governments’ unwillingness to modify laws that could make such warehouses catalysts for rural prosperity and agricultural growth, is obviously going to hurt small farmers terribly in the coming years.

It is possible that this is what K C Chakrabarty, deputy governor of the RBI, was hinting at in his address at the National Seminar on Productivity in Indian Agriculture, College of Agricultural Banking (CAB) earlier this month.

He said, “Growth in agricultural credit . . . which picked up in early 2000s and continued till 2006-07, is again showing a declining trend in the recent years.”

It remains to be seen whether new laws and measures will prevent such reckless erosion of creditworthiness of India’s borrowers.  Such are times when bad policies teach people to become immoral, rather than the other way round.