Editorial Simplified: Examining Farm Loan Waivers | GS – III

Economists and bankers are sharply divided on whether farm loan waivers are desirable. One section of economists and hard-nosed bankers argues that loan waivers represent poor policy for a variety of reasons.


Relevance: GS Paper III


Theme of the article

The solution lies in better schemes that ensure universal coverage for small, marginal and medium-sized farmers.


Why has this issue cropped up?

Till now, at least 11 States have announced schemes to waive outstanding farm loans. The pitch for waivers among States has added to the pressure on the Central government for a nationwide farm loan waiver.


Problems with loan waivers

  • REPAYMENT: Loan waivers have “reputational consequences”; that is, they adversely affect the repayment discipline of farmers, leading to a rise in defaults in future.
  • PRODUCTIVITY: Earlier debt waiver schemes have not led to increases in investment or productivity in agriculture.
  • CREDIT: After the implementation of debt waiver schemes, a farmer’s access to formal sector lenders declines, leading to a rise in his dependence on informal sector lenders; in other words, waivers lead to the shrinkage of a farmer’s future access to formal sector credit.

Critical assessment of above arguments

  • REPAYMENT: Farmers are most disciplined in their repayment behaviour. In September 2018, agricultural NPAs (about 8%) were far lower than in industry (about 21%).
  • DEFAULT: There is no evidence to argue that the 2008 loan waiver led to a rise in default rates among farmers.
  • PRODUCTIVITY: The argument that loan waivers do not promote investment or raise productivity is a bit absurd because nowhere has investment or productivity figured as the official objectives of these schemes.
  • CREDIT: The argument that loan waivers shrink access to formal credit sector for farmers is only partly true. But the culprits here are banks and not farmers. After every waiver, banks become conservative in issuing fresh loans to beneficiaries, as they are perceived to be less creditworthy.

Arguments for loan waivers

Firms have always received debt waivers. Just as for firms, farms also need a reduction of debt burden, followed by fresh infusion of credit, when their economic cycle is on a downturn. The demand for loan waivers in India is absolutely logical when viewed from such a standpoint.


Not a panacea

  • To consider loan waivers as a panacea for the agrarian distress would be wrong.
  • Access to India’s rural banks is skewed in favour of large farmers.
  • While public banks actively service the credit needs of large farmers, a majority of small and marginal farmers are not proportionately included.
  • The latter are forced to rely on informal sources, particularly moneylenders, for much of their credit needs.
  • As a result, the benefits of loan waivers accrue disproportionately to large farmers while only marginally benefiting the small and marginal farmers.

The solution

  • The solution lies in carefully designing waiver schemes that ensure universal coverage for small, marginal and medium-sized farmers while covering both the formal and informal sources of debt.
  • The Kerala Farmers’ Debt Relief Commission Act, 2006 is an excellent model in this regard. This scheme defines debt as “any sum borrowed by a farmer from the creditor”, with the creditor defined as “any person engaged in money lending, whether under a licence or not”.
  • Legislations such as Kerala’s are blueprints to design comprehensive, inclusive and less-leaky loan waiver schemes in other States.
  • While loan waiver schemes are like a band-aid on a wound, it is the larger agrarian distress that demands urgent policy attention.
  • Unless there are steps to raise productivity, reduce costs of cultivation, provide remunerative prices, ensure assured procurement of output, expand access to institutional credit, enhance public investment, institute effective crop insurance systems and establish affordable scientific storage facilities and agro-processing industries for value addition, etc, farmers will continue to be bonded to low income equilibrium and repeated debt traps.