How 'loan waiver' affect the flow of agricultural credit





Soon after taking over as the Governor of the Reserve Bank of India, Mr Shaktikanta Das struck a note of caution against waivers of agricultural loans. In early January, 2019 Mr Das said that states should think hard before declaring loan waivers as the entire public finance system gets hugely disrupted due such decisions. He said that three states – MP, Rajasthan and Chhattisgarh – alone had Rs 1.47 lakh crore loan exposure in agriculture.
But the issue doesn’t end here. Such political decisions also have an implications in terms of raising risks for the financial exposures in the sector as it also reinforces aversion to loan repayment. This in turn leads to higher perceived risk in giving out loans for the financial institutions as people tend to delay repayment in the hope of getting a waiver from the government.
The opposition to such waivers rests on a) greater propensity towards fiscal profligacy and b) disrupted credit culture. Just before Mr Das sounded his alarm, in December, 2018, the bankers had voiced their worry about how tendency to waive agricultural credit would enhance bad practices in the loan market in so far as loan repayment environment was concerned. However, there is a third crucial factor – the small farmers who are susceptible to the market fluctuations and the vagaries of nature.
Bankers, we must realise, are compensated for the part of the loan that is waived from the government coffers. So ultimately the onus shifts on to the shoulders of the tax payers even if the government decides to take the debt route instead of the tax route. Because the government will have to meet the debt repayment burden from the revenue earnings which are nothing but taxes realised from the citizens.
But the worry goes deeper as the culture plays with the expectations about the need to repay the loan. India unfortunately has built up a tradition of loan waivers. If we go back to the days of the loan melas where banks were just treated like taps for disbursement of money with a very high probability of loans getting waived, specially in the agri sector, it is easy to understand why people expect that sitting tight on repayment will not attract any penalty and the government would eventually declare a waiver.
The narrative that tends to unfurl from here is that the loan channels are also not spared in terms of cost. A loan given out whose repayment inflow is disrupted due to defaults plays havoc with the balance sheet of the channels, which ultimately not only bleeds the credit agencies it also costs the economy in terms of raised risk profile that necessarily has an hardening impact on the interest rate structure of the economy. Ultimately, the final sufferers become the farmers as within the structure an aversion builds up in creating an extra effort to reach out to them with loans that they need.
This argument however does not take away the merit of the third factor that triggers the politically motivated waiver decisions. A waiver of this nature is understood in the political decision making process as the sure fire step of garnering votes no matter what the cost is to the economy. An alternate way would of course be to look into the ways of providing them with the required relief while avoiding the waiver route – be that through an affordable route or some other way.
Net net, the point that flows from the above logic is that though loan waiver leads to benefits to a limited set of stake holders, in the medium to long term this strategy actually harms the intended beneficiaries by hardening the resistance of loan channels for going for greater and longer exposures in the agricultural sector.

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2 comments

  1. Better policies can facilitate self sustainability in agriculture sector. Reliance Ambani is not a person to do agriculture that engages farmers. Reminfs me of "do bigha jameen" of Bimal Roy. Dignity is paramount. Perhaps ahead of quality of life, but both factors hhve taken backstage while earning a living. Dont understand as to why to cripple a system that involves tax payers, financial facilitators besides the consumers. For a common man, it would be consoling if it can be proven that the quality of life has become better with loan waivers.

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