Farm loan waivers, although not a recent phenomenon, has attracted the interest of all political parties irrespective of their economic ideology, after the Congress-led coalition returned to form the government post the 2009 general election and announced the then largest waiver scheme. It has now become the flagship poll promise of almost all political parties. On the other hand, there are economists and bankers who criticise it saying that it destroys the credit culture among farmers and that it does not reach the needy.
As per RBI data, collected from scheduled commercial banks (public and private), foreign banks and Regional Rural Banks (RRBs) through basic statistical returns (BSR-1), the total amount of loans outstanding through direct financing to the agriculture sector in rural areas as on March 2017 is Rs 4.25 lakh crore, with the total number of accounts taking such loans being 4.21 crore, leading to an average of just over Rs 1 lakh per account. The number of accounts availing direct finance for agricultural purposes in rural areas has steadily declined in the 1990s, from 1.82 crore in 1992 to 1.24 crore in 2001.
Nevertheless, this number has grown thereafter especially from the year 2005, coinciding with a steady growth in agricultural commodity prices. The average outstanding amount of loan per account grew to Rs 1 lakh in 2017 from Rs 20,000 in the year 2002. There was a marginal decline of 0.3% in the number of accounts during the year 2009, which was the year in which the loan waiver scheme was introduced, but the average growth remained significantly high thereafter.
Comparing this data with the number of agricultural households in India, as estimated by the National Sample Survey Office (NSSO), shows an interesting fact – the number of bank accounts availing direct finance for agricultural activity has seen a significant boost post the farm loan waiver in the 2008-2009 union budget. The average of the number of accounts as percentage of agricultural households – which can be used as an indicator for measuring the extent of banking – was 17.8% eight years prior to FY 2008-09 which more than doubled to 36.7% in eight years post that year. Based on the 2017 data, southern states like AP (including Telangana) and Tamil Nadu maintain a lead in this statistic while Chhattisgarh, Rajasthan, Madhya Pradesh and Gujarat lag far behind the rest of the states. From this, we can infer that the loan waiver scheme is at least providing a boost to formal banking activity in rural India while driving out informal money lenders – to that extent – from the business of lending to agricultural activity in rural areas.
Scheme benefits must reach only the needy
For the loan waiver scheme to be more successful, it is necessary to ensure that the scheme benefits reach only the truly needy, that is, the most distressed farmers who are affected by the vagaries of weather, pest attacks and other crop damages. The leakage of scheme benefits and other forms of loans, especially those taken for non-agricultural purposes, should be prevented at the bank and branch level.
For instance, the number of accounts that availed direct finance for agricultural purposes in metropolitan cities issued by private banks shot up to 25.49 lakh in 2008-09 from 5.13 lakh in the previous year. A year later, the number reached the normal level of 3.65 lakh. Paralleling the same, loans taken for professional and other services came down to 2.07 lakh in 2008-09 from 36.09 lakh in the previous year and went up to the level of 20.8 lakh a year later. This could be a possible indication that private sector banks in metropolitan areas diverted the scheme benefits to write off non-performing assets in non-agricultural sectors by just changing a few digits of the code assigned internally to the respective category of accounts.
To avoid leakages, the RBI must play its part to ensure that the benefits reach only the needy. Limiting the waivers only to loans issued by branches located in rural areas and/or designating only certain branches in metropolitan and urban areas for issuing agricultural loans and avoid giving all other types of loans with similar credit structure from those branches is necessary to avoid manipulation and leakages at the branch and bank level.
Views expressed are the author’s own.