Reforming Loan Waivers - Kerala Model

Why in news?

Union government is discussing a scheme to waive outstanding farm loans.

What is the NPA status of Farm loans?

•  NPAs in agriculture remained stable at around 4 to 5% between 2011 and 2015.
• This was despite the fact that agricultural growth averaged just 1.5% between 2011 and 2015.
• The rise in agricultural NPAs between 2009 and 2011 was due to the “general economic slowdown” after 2009 and the introduction of new norms in the “system-wide identification of NPAs”.
• Agricultural NPAs began to rise again after 2015, it was real, policy-induced and a direct consequence of acute agrarian distress that spread across rural India after 2015.
• In particular, the demonetization of November 2016 aggravated already brewing agrarian distress by sucking cash out of the rural areas, crashing output prices and disrupting supply chains.

What are the issues with loan waivers?

• Loan waivers have “reputational consequences”; that is, they adversely affect the repayment discipline of farmers, leading to a rise in defaults in future.
• Earlier debt waiver schemes have not led to increases in investment or productivity in agriculture.
• After the implementation of debt waiver schemes, a farmer’s access to formal sector lenders declines, leading to a rise in his dependence on informal sector lenders, in other words, waivers lead to the shrinkage of a farmer’s future access to formal sector credit.
• Majority of small and marginal farmers are not proportionately included.
• The latter are forced to rely on informal sources, particularly moneylenders, for much of their credit needs.
• As a result, the benefits of loan waivers accrue disproportionately to large farmers while only marginally benefiting the small and marginal farmers.

Why do farmers need more than loan waivers?

• In India there have only been two nationwide loan waiver program in India after Independence: in 1990 and 2008.
• Farmers are most disciplined in their repayment behavior, In September 2018, agricultural NPAs (about 8%) were far lower than in industry (about 21%).
• Furthermore, agricultural NPAs were on a continuous decline between 2001 and 2008.
• There is no evidence to argue that the 2008 waiver led to a rise in default rates among farmers.
• The lowest of all NPAs after 2001 was recorded in March 2009 (2.1%), which was just after the implementation of the 2008 scheme.
• The reason was the government’s cleaning up of the account books of banks.
• Once this was complete, it was totally expected that NPAs would rise again to settle at a slightly higher level. This was exactly what had happened: agricultural NPAs rose and settled at about 5% by 2011.
• For two reasons, the rise of agricultural NPAs, from 2% to 5%, is no evidence for indiscipline in farmer repayment behavior.

Why at times Loan waivers are significant?

• Loan waivers do not promote investment or raise productivity, it is a bit absurd because nowhere has investment or productivity figured as the official objectives of these schemes.
• After every waiver, banks become conservative in issuing fresh loans to beneficiaries, as they are perceived to be less creditworthy.
• In India firms have always received debt waivers, though they are tactfully termed as “loan restructuring” or “one-time settlements”.
• Just as for firms, farms also need a reduction of debt burden, followed by fresh infusion of credit, when their economic cycle is on a downturn.
• The demand for loan waivers in India is absolutely logical when viewed from such a standpoint.

What union government can learn from Kerala?

• The solution to address farmer distress lies in carefully designing waiver schemes that ensure universal coverage for small, marginal and medium-sized farmers while covering both the formal and informal sources of debt.
• The Kerala Farmers’ Debt Relief Commission Act, 2006 is an excellent model in this regard.
• This scheme defines debt as “any sum borrowed by a farmer from the creditor”, with the creditor defined as “any person engaged in money lending, whether under a license or not”.
• The commission’s mandate included the right “to fix, in the case of creditors other than institutional creditors, a fair rate of interest and an appropriate level of debt, to be payable…”
• That is, the commission could waive, reschedule or reduce any debt on a need-basis after a detailed hearing of both the parties.
• Legislations such as Kerala’s are blueprints to design comprehensive, inclusive and less-leaky loan waiver schemes in other States.
• Apart from this steps ‘to raise productivity, reduce costs of cultivation by providing quality inputs at subsidized rates, provide remunerative prices needs to be taken.

Source: The Hindu