Agriculture Loan Waivers and Moral Hazard
Mathur K Nanjunda, GM (retd.), State Bank of Mysore
June-2018; Money Wise
As Election year is approaching, the rallying cry for Farm Loan waiver is becoming louder by the day. In the Karnataka State Election, political parties have made this promise in bold letters assuring loan waivers across board. Already UP, Maharashtra, Karnataka and Punjab have implemented loan waivers last year to various extents aggregating $15 Billion
- Despite good monsoon in 2016, the expected easing of farmers finances did not happen due to multitude of reasons viz., glut /oversupply which depressed prices , demonetisation , export restrictions etc.,. India’s agricultural sector’s problems are long-standing: the country suffers from small, fragmented land plots. Inadequate infrastructure for transportation and storage results in farmers not being able to get their goods to market or store their crops to wait for better prices. An estimated 30% of produce goes waste every year because there is not enough storage and supply chain infrastructure. Farmers are often at the mercy of middlemen and have little pricing power. While harvests were good (overall) in the last two years, demonetisation caused prices of veggies to fall significantly. Without access to cash, farmers could not procure seeds and fertilizers in time. With their incomes getting adversely affected, loans remained overdue.
- Farm Loan waivers are not new to India. In 1990, Govt waived nearly $5 billion of farm loans. In 2008, the Congress Government waived Rs$15 Billions of farm loans. The aggregate loan waivers to Agra sector by the Central /State Governments to 50 million farmers. Loan waivers could go up to 2.6% of GDP.
- PSBs are suffering due to high impact of bad loans ((GNPA>15%) and their need for new capital has increased considerably due to BASEL-III guidelines. At this juncture making farm loan waiver as a standard package in elections will erode public confidence in PSBs and one can easily imagine the consequences. Banks’ ability to make new loans will get hit due to rising NPAs as most of the new borrowers expect waivers in the next round. The nascent Micro Finance Industry which is seeing >98-99% repayments that too with higher rates will also take a cue from this and increased defaults in this segment will end the strong financial discipline brought about by MFIs/Banks all these years. The waiver regime creates a moral hazard in that the defaulter is valued more than the prompt re-payer of loans. This happens across institutions and regions in the country and it will be very difficult to come back from this crisis.
- While the Governments may argue that they will provide budgetary support for waivers and banks will not be made to suffer the burden of waivers, ultimately, the funding of Budget Gap has to be borne by the tax payers only. Apart from causing inflation, these types of expenses are not productive and may create a social divide with an extreme focus on farm community vs others. Then questions arise as to “what should be done to alleviate farmers’ distress?” “Is it not true that farmers are even opting for suicide in the context of their inability to pay back loans?” “Are not large corporate defaulting lakhs of crores to banks?” All these are valid questions no doubt. But the answer is not to right a wrong by another wrong approach.
- First, the state governments need to build proper data base of land records and ownership details. There should be proper documentation on crop failures /farmers’ distress in each taluk /block level. Early response to be given by the BDOs, Banks and the State Government when they see the problem cropping up (production constraints, low prices, linkages etc.). Insurance products to be used to protect investments. Solutions to distress should be based on actual on the field issues and not a general waiver of loans. Reduction/partial waiver of interest, re-scheduling to be preferred instead of lump sum waivers. Special funds to be created to provide succour to distressed farmers by the State/Central Governments. Banks including Co-operatives should be shielded from the effects of bad loan write offs stemming from Govt actions. There should be incentives for prompt payers in the form of interest reduction, higher limits, and easy/automatic renewals
- Farmers are much favoured segment of our society but with good reasons. There is no Income Tax on their income. Many State Governments have given free power and they enjoy price subsidies on the produce. SME sector also faces business hazards with low capital base and substantial NPAs have accumulated here too. Even Retail loan segments like Housing and Education are facing loan defaults. In the current political atmosphere, general public expects all loans given by PSBs will eventually be waived. Non discriminatory loan waiver across the board applicable to all borrowers is a bad idea. This approach actually creates bad borrowers who only avail credit with wilful intention to default and get waivers. This has happened in 2008 waiver and others which followed it. Usually upper middle and well to do farmers who are well versed with the Govt’s ways avail the waivers efficiently while the real poor /marginal farmers get left out.
- Loan waivers are not viewed benignly by the outside world/rating agencies. Perception of India would suffer in the eyes of global financial world if these loan waivers become standard fixture in our economy. It could affect our country rating with adverse consequences for raising funds from abroad by our Government/Corporates. The new FDRI Bill which talked about “Bailing In” of banks created doubts in the minds of depositors as regards the safety of their deposits with banks. Extensive and frequent loan waivers will exacerbate this notion and people may not trust PSBs with their funds. Although this appears to be too far on the horizon, things can worsen quickly.