How farm loan waivers can actually benefit the economy

Abstract

The fastest-growing major economy of the world cannot ignore its farmers as there is a genuine need to help the farming sector which is suffering from stress on account of indebtedness. The banking industry is also not able to extend credit to those farmers who are in default. A loan waiver can help bankers to renew the loans, and farmers can use the borrowed money for production of more crops, hopefully manifold than the amount of the loan waiver. In fact, a loan waiver can actually benefit the economy, but not in the way it is fashioned now. The analysis needs more depth. India has a history of loan waivers and farm loans have been waived off by different political parties in different parts of the country. Loan waivers not only erode credit discipline of the agricultural sector, but also in other sectors across the country. There are documented studies to show that willingness, and not the ability, has contributed to increasing delinquencies after loan waivers, and banks took nearly a decade to recover from the loan waiver of Rs10,000 crore given by the VP Singh government in 1990. Thus, loan waivers need to be carefully crafted.

There is a need to examine this critical issue from the farmer’s perspective. It has to be recognised that awareness and coverage of crop insurance is grossly inadequate. Also, given the life-cycle and shelf life of crops, in the absence of warehouses and agro-processing units, price and market insurance is completely absent. Thus, supply gluts take place and farmers are forced to destroy their crops many a times. Loan defaults by farmers, starting much before a loan waiver, impact the credit history of a farmer, apart from the fact that access to new loans is not available. Further, as institutional lenders withdraw from the area, after a loan waiver, borrowers are pushed to high-cost unorganised channels, like moneylenders. The withdrawal of public sector banks from tractor financing is an exemplary illustration. Therefore, neither loan default nor loan waiver is a celebratory event in the life of a farmer. Read more at: https://www.financialexpress.com/economy/how-farm-loan-waivers-can-actually-benefit-the-economy/730029/