Farm debt waiver hits credit offtake
Months after Uttar Pradesh and Maharashtra announced that they would waive farm debt, Reserve Bank of India (RBI) Governor Urjit Patel had warned of the “negative side effects” of the decision such as faulty targeting of beneficiaries, incentivising wilful defaulters, and eroding credit discipline.
A year later, cracks in credit culture have become visible. Loans taken by farmers for cultivation and allied activities have fallen short of the target set by banks in the last two years, a Business Standard analysis of the data from state-level bankers’ committees (SLBCs) has shown.
Loss in creditworthiness owing to the tendency to delay repayment, lag in states’ payment towards the scheme, stringent conditions for becoming beneficiaries of the scheme are major reasons for the shortfall in disbursing bank credit to the farm sector, experts said.
As bank credit falls, it makes way for informal credit through channels such as shopkeepers and large landowners. Maharashtra’s 2017-18 Economic Survey said agricultural finance through licensed moneylenders rose about 30 per cent in 2017-18.
Bankers said a similar increased preference for informal lenders was evident from this. The RBI data on gross bank credit separately shows that in 2017-18, credit growth to agriculture was the slowest in almost a decade. Take the case of Maharashtra, which has approved a debt waiver of ~340 billion. Against the target of lending ~542 billion to farmers for crop cultivation in 2017-18, banks lent ~253 billion, a mere 47 per cent achievement.
Commercial banks were stricter in lending than the cooperative banks, according to the data. This underlines the possibility that the commercial banks after the loan waiver announcement were in a more precarious condition than cooperative banks after demonetisation, some bankers said.
“Waiver schemes incentivise default and make defaulters ineligible for new finance. The share of new loanee farmers in any year is very low, thus reducing the overall exposure to farmers,” a banking executive in the SLBC of Rajasthan told Business Standard.
The scale of finance — or the loan amount eligibility — increases every year following the rise in input costs. But farmers who do not repay after the waiver announcement become
ineligible for the improved scale of finance, which further reduces the exposure, he added.
The lag in cleaning up the balance sheets of banks puts them in a bind since all farmers exposed to bank finance stop repaying, but only part of it gets covered in states’ annual budgets, said experts.
“In the 2008-09 nationwide farm debt waiver, the government intended to spend ~720 billion, but ended up spending ~520 billion, which shows that in addition to delayed funding of the scheme, the government ended up spending less than the amount announced,” said Ashok Gulati, a noted agricultural economist and Infosys Chair professor for agriculture at the Indian Council for Research on International Economic Relations (ICRIER). He said non-farm players such as farm-produce processing companies were cornering credit, and that credit to farmers could be still less. Bankers in Telangana and Maharashtra said political figures were misguiding farmers.
“With no repayment, their eligibility for interest subvention is lost. Further, they are not aware of their CIBIL score which is getting affected, which will reduce the scale of finance in successive years,” one of them said.
A research paper published by the RBI in August 2017 noted that while the loan performance of distressed borrowers whose loans had turned bad improved 16-20 per cent after the waiver was implemented, that of non-distressed beneficiaries — the timely repayers — declined 11 per cent.
In addition, states walk a tightrope in trying to balance farmers’ demand for waiver and the resulting fiscal pressures by putting pre-conditions for prospective beneficiaries. While Uttar Pradesh waived loans of up to ~100,000, Maharashtra capped the benefit at ~150,000, but with stricter conditions to avail benefits. As a matter of fact, the crop credit shortfall was 24 per cent in UP, while it was 53 per cent in Maharashtra in 2017-18.