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Credit Policy and Loan Waivers

November 14, 2017
11 months

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 -
  1. the Kisan Credit Card scheme in 1998.
  2. the Agricultural Debt Waiver and Debt Relief Scheme in 2008.
  3. the Interest Subvention Scheme in 2010-11.
  4. the Pradhan Mantri Jan-Dhan Yojana in 2014.
  • 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

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