What was the “Agricultural Debt Waiver and Debt Relief” Scheme about?

Photo Credit: http://www.aegindia.org

According to Malcolm Harper, “the loan waiver scheme is an expensive, populist device that won’t have much effect” (Eye on Microfinance, Volume 7).  This was in response to the In March 2008 “Agricultural Debt Waiver and Debt Relief” scheme announced by Finance Minister P. Chidambaram.  The scheme was an INR 600 billion package, offered to nearly 30 million farmers. Marginal farmers – with cultivation land less than 1 hectare, and small farmers – with cultivation land between 1 and 2.5 hectares, were given a complete waiver on loans disbursed up to March 31, 2007, which were overdue as of December 2007, and unpaid as of February 29, 2008. Other farmers – with cultivation land over 2.5 hectares, had 25% of their loan waived as long as they paid back the 75% of the loan (25% or INR 20,000 of the loan, which ever was higher) (AGRICULTURAL DEBT WAIVER AND DEBT RELIEF SCHEME (RBI), 2008).  The scheme was introduced to alleviate the miseries farmers and address farmer suicides.  However, there has been widespread criticism of this scheme:

  •  Limited impact on productivity - There is insufficient evidence that blanket loans waivers such as this, have an impact on agricultural productivity.  Evidence from NSSO suggests that nearly 40% of the loan amount is used on non-agriculture purposes such as marriages, education, health etc (LOAN WAIVER SCHEME AND INDIAN AGRICULTURE, 2008). Subsidies for specific inputs such as seeds, fertilizers based on specific regional needs might be more effective than loans that are not attached to any specific use. 
  • Credit alone is not enough - Evidence indicates that “foodgrains growth fell from 2.85 per cent in the 1980s (1980-81 to 1990-91) to 1.16 percent in the 1990s (1990-91 to 2003-04), which was lower than the rate of growth of population of 1.9 per cent during this period” (Report of the Expert Group on Agricultural Indebtedness, 2007). While the economy itself may have shifted to a more service based economy and away from agriculture, the agricultural sector has benefited little from technological advancements.  There has been little improvement in agricultural infrastructure (such as irrigation systems) or market linkages, and the wide spread corruption in Indian politics hasn’t helped.
  • Burden on Banks - The scheme does not help the banks either, because they forced to lend to both viable and unviable clients using the same lending parameters. In addition, banks have to write off bad loans, which are expensive not only for the banks, but also the government. It is estimated that in 2010-2011, nearly 73% of Priority Sector Lending resulted in bad loans, and nearly 44% of these loans were in the agricultural sector (The big  problem of agricultural loans, livemint.com, 2008).
  • Informal lending un-addressed - Most farmers take loans either from the bank or the moneylenders for agricultural purposes (LOAN WAIVER SCHEME AND INDIAN AGRICULTURE, 2008). This scheme does not address loans taken from informal sources. In addition, there were farmers who took on expensive loans from the informal sector (moneylenders) to pay off their agricultural debt.  They were not rewarded under this scheme, and it may seem that farmers were penalized for returning the debt on time.
  • Misclassification of credit need - Classification of marginal, small and other farmers is inadequate.  According to MS Swaminathan, small farmers (less than a hectare) may be able to manage their irrigation needs better than farmers with medium sized land (4-5 hectares), who might have to largely depend on monsoon for irrigation. However, the scheme seems somewhat regressive in that it does not provide enough support for farmers with over 2.5 hectares of land. The size of the land in itself might not be a robust indicator of credit worthiness or credit need.
  • Insufficient monitoring and evaluation - The scheme requires the lending institutions (commercial and public) to appoint a Grievance Redressal Officer in each State.  However, it is unclear how RBI wanted to monitor the loan usage and grievance issues. Also, there was insufficient monitoring and evaluation to determine whether the scheme worked or not.
So why does this wavier, sanctioned in 2008 hold relevance 4.5 years later? It is because these types of populist schemes have the capability to sway elections; we saw a blanket loan waiver scheme in 1989, and we might except to see more of the same during the 2014 general elections.  The question yet to answer is whether these schemes really have an impact on agricultural productivity and well-being of the farmers. It is often said that loan waivers seem to “cure the symptoms, and not the disease”, there is a need to better understand the credit needs of the agricultural sector, and specifically the credit needs of the farmers based on the region and weather patterns, and their risk appetite.  A more holistic approach to lending is needed, rather than a slap-dash loan waiver program. There also needs to be more emphasis on markets linkages, weather and crop insurance, and a greater application of technological innovations in agriculture. 
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  1. Banks are mandated to lend 18% of their ANBC to agriculture (both direct and indirect lending). When such a target is set, it becomes obvious that any emphasis on underwriting guidelines would take a backseat, and asset quality would deteriorate. This has been coupled with two rather opposing measures – interest subvention for farmers who are exhibiting good repayment histories, and loan waivers for those farmers who fail to repay their loans – has inevitably led to the destruction of credit culture for the future of bank-led agri credit. The result of this, at a mass scale, is the huge stress that the banking sector is under, and consequently the depositor base is under. The big question is why choose the credit system for this? Why not use the fiscal channel of direct cash transfers and subsidies instead of the banking channel.

  2. Good piece - sums up the scheme very succinctly. While holding fullest sympathy for debt-ridden farmers, I feel that the biggest downside of this scheme is that it is going to reward bad behaviour. Those farmers who have accumulated debt will know that in a decade's time, their debts will be waived off too. And the sad part is that having had their accounts "cleaned up", there is no guarantee that these poor souls will have access to formal credit again. The banks are sure to be wary of lending to them again and accumulating more NPAs with no guarantee of reimbursement from govt.

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