Loan waivers for farmers, but how effective are they?

The UP govt. recently announced a huge loan waiver package for the farmers. This is not the first time a govt has announced such a package nor this will be(unfortunately) the last time. Before we judge whether the package would really benefit the farmers or not, lets look at some factual information about how the packages were (not) implemented in the past and also dig into some history why loan waivers are never the answer to the problems faced by the farmers.

What happened in 2008 with the biggest loan waiver?

52,000 crores was released by GoI as part of the Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS), launched in May 2008, in order to address the financial indebtedness of the farmers, right before the 2009 elections. Farmers & their issues have always been part of the election campaigns, but that’s where they always remained and loan waivers became an easy way out to brush the farmers issues under the carpet. The money was to clear part of the dues of farmers against specific parameters based on small/marginal/other farmers and the period of disbursal of loan, its overdue and unpaid/position.

The CAG audit revealed lapses and errors raising which included inaccuracy of claims to inclusion of ineligible beneficiaries to accuracy of claims to reimbursement of lending institution, all ranging serious concerns about the implementation of the scheme.

  • The farmers entitled to receive the benefits where not included in the list of beneficiaries by the lending institutions
  • Farmers who had taken loans for non-agricultural purposes were given benefits under the scheme
  • Lending institutions responsible for charges such as legal, inspection, miscellaneous claimed from the government
  • Loans amounting to hundreds of crores not be waived under this scheme were also waived off
  • No record of loan application receipts or acknowledgements from farmers confirming the receipt of the loan waivers
  • Lending institutions were responsible for implementing the scheme and also monitoring of their own work – a clear conflict of interest. The monitoring was to be done by the nodal agencies, which was never in place
  • Tampering, over writing and alternation were found with the claim records thus creating serious doubts over the documentation
  • Commercial bank received reimbursement for loans, amounting to 164.40 crores were extended to micro financial institutions
  • Debt waiver/relief certificates were not issued in many cases for eligible beneficiaries

History of loans & rural indebtedness

It was in 1904 the cooperative societies/banks were created to provide cost-effective financial services to the farmers. However, due to the problem of frozen-assets and heavy overdues in repayment, the State Bank of India was created in 1955 with an objective to extend banking services to rural and urban areas. This was followed by the nationalization of commercial banks in 1969 to further enable the govt. to extend credit to agriculture proactively. Regional Rural Banks in 1975 and the establishment of NABARD in 1982, were all efforts to make credit easily accessible to the farmers and in general to the agriculture sector.

Aside from creating the lending institutions, the GoI also introduced various lending schemes such as Kisan Credit Card Scheme etc.

Despite the various efforts to establish, enable and empower institutional lending to the agriculture sector starting all the way from 1905 till date, the non-institutional lending contributes to a whopping 46% of lending, as per the 2013 NSSO data, with the private money lenders contributing 33%.


Break up of Institutional & Non-Institutional Credit, 2013


What kind of credits do the farmers typically need? 

Credit in general is divided into 3 categories – short-term, long-term & indirect

  • Short-term agricultural credit or crop loans enable cultivators to procure inputs such as fertilizer and seeds needed for seasonal agricultural operations
  • Long-term credit is for investment in fixed assets, such as irrigation pumps, tractors, agricultural machinery, plantations and those related to dairying, fishing and poultry.
  •  Indirect finance of agriculture includes loans to input dealers, loans for setting up agri-clinics and agribusiness centres, loans to microfinance institutions, loans to dealers in agricultural machinery and drip and sprinkler irrigation systems, loans for construction and running of cold storage units, irrespective of their location, loans to food and agro-processing units, and diverse other activities related to agriculture.

The AIDIS data reveals a sharp rise in the share of short-term credit in the proportion of input costs points towards diversion of subsidized credit for non-agricultural purposes.

A farmer who receives loans at a concessional rate of 4 per cent can easily deposit in a financial institution and receive an interest rate of approximately 7.5-8.0 per cent in a fixed deposit scheme for six months.

Indirect credit has risen even more impressively, due mainly to more and more categories being brought within the ambit of agricultural credit.

There is enough data to prove that not all the credit is what it seems and better transparency and monitoring systems need to be first put in place to avoid the misuse and exploitation by both the banks and the beneficiaries.

So why is it that despite the block buster loan waivers & the institutional lending, farming continues to suffer?

First, the simple answer – Lack of accountability and lack of proper monitoring reduces the effectiveness of the loan waivers. This coupled with the fact that not all the debt is formal, reduces their effectiveness even more.

Now to the more elaborate answer. When a farmer’s loan is waived off by the bank, the chances of them getting subsequent loans from the same banks is at great risk, because the farmer is now a risky borrower. Given how the farmer’s income is at the mercy of so many factors starting from the weather to the water but most importantly the minimum support price offered by the govt. for the produce, the income is never enough to cover for the expenditure. This pushes the farmer into further debt and this time since the banks won’t offer the loans, their only option is the private money lenders.

So unless the real issues that push the farmers into debt are addressed, no matter how many loan waivers are announced, they are never going to make farming and farmers sustainable.

What is the way forward?

  1. Not more lending institutions but better lending institutions with transparency and accountability.
  2. While we seem to be in a rush to go digital and go cashless, there is a greater need to bring technology closer to the farmers
  3. Its time we make smart villages so they became self reliant. In other words, the farmers should be empowered to store, process and package their produce so they can maximize their profits
  4. We keep hearing how software engineers quit their jobs and turn to farming. They are able to do this because they have better access to information, technology, market and various other resources. There is no reason why the same can’t be made available to the farmers
  5. More than 50% of the Indian population still depends on agriculture. This is where the real potential of “Make in India” lies
  6. Land continues to be a major reason which makes or breaks (quite often is the case) the farmers. The 2013 Land Acquisition must be enforced rather than diluted
  7. Obviously involving farmers in these kind of discussions and debates will help not just formulate these policies, but also allow for a better implementation.

Farmers are not a liability they are our assets and hence should treated as such.




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