1. Farm loan waivers: Narendra Modi cabinet extends interest subsidy; Will apply to loans up to Rs 3 lakh

Farm loan waivers: Narendra Modi cabinet extends interest subsidy; Will apply to loans up to Rs 3 lakh

While the Centre has made it clear that the states announcing farm loan waivers will have to do so from their own resources, it on Wednesday sought to play its part in assuaging farmers’ woes.

By: | New Delhi | Published: June 15, 2017 7:08 AM
FARM LOAN WAIVER, NARENDRA MODI GOVERNMENT, CABINET The Cabinet also cleared a proposal to introduce a Bill in Parliament for setting up a resolution corporation to deal with bankruptcy in banks, insurance companies and other financial entities. (PTI)

While the Centre has made it clear that the states announcing farm loan waivers will have to do so from their own resources, it on Wednesday sought to play its part in assuaging farmers’ woes. Short-term crop loans of up to Rs 3 lakh will continue to attract a subsidised rate of 7% this fiscal and farmers making “prompt” repayments will get the loans at just 4%, as the Cabinet on Wednesday approved a proposal to extend its interest subvention scheme for such loans to 2017-18. The Cabinet also cleared a proposal to introduce a Bill in Parliament for setting up a resolution corporation to deal with bankruptcy in banks, insurance companies and other financial entities. The Financial Resolution and Deposit Insurance Bill, 2017, is aimed at inculcating discipline among financial service providers in the event of financial crises by “limiting the use of public money to bail out distressed entities”. Once cleared by Parliament, the new law for financial firms will complement the existing insolvency and bankruptcy code (which is meant for dealing with non-financial entities) and will provide a comprehensive resolution framework for the economy.

Although the government’s move to keep the cost of short-term crop loans cheap comes as a breather for farmers struggling to cope with a fall in prices of some commodities, the cost to the government on account of the move is estimated at Rs 20,339 crore in 2017-18. The Cabinet also decided to provide farmers loans for post-harvest storage of their produce at a subsidised interest rate of 7% for six months. For those farmers adversely affected by natural calamities, the government has decided to give a 2% interest subsidy for first year on the restructured loan amount.

The institutional credit will help farmers shift from unorganised sources of credit (where they are forced to borrow at exorbitantly high rates of interest) to institutional ones. Since crop insurance under the Pradhan Mantri Fasal Bima Yojana is linked to availing of crop loans, the government’s latest decisions will benefit farmers.

In recent months, farmers from Madhya Pradesh to Tamil Nadu to Punjab have been demanding complete waiver of loans, citing lower realisations. Uttar Pradesh has already announced waiver of farm loans of Rs 36,360 crore; although Maharashtra is yet to announce how much loans will be waived, reports suggest that these would be around Rs 35,000 crore.

Interest subsidies and loan waivers are sure to put a question mark on the credibility of the fiscal consolidation exercise to be undertaken by both the Centre and the states in 2017-18, more so when government spending has been a prime driver of the economy as private investments falter.

The Centre aims to cut the fiscal deficit to 3.2% of GDP in 2017-18 from 3.5% in the last fiscal, while states, according to the NK Singh panel, need to cut their fiscal deficits by 16 basis points a year from 2.98% in 2016-17 if they want to achieve the current debt-to-GDP ratio of 21% again in 2024-25.

States that have fared commendably on the fiscal front between 2004-05 and 2013-14 reported slippages since then as their tax revenue growth plateaued; the consolidated fiscal deficit of states is reckoned to be not less than 3.4% of GDP in 2016-17 and the target of 2.6% for the current year looked optimistic even before the loan waiver packages.

Through the subvention scheme, the government offers an interest subsidy of 2% per annum for short-term crop loans of up to Rs 3 lakh per farmer on the condition that the lending institutions make short-term credit available at the ground level at 7% to farmers. An additional 3% interest subsidy is provided to the “prompt payee farmers”.

The interest subvention scheme, which has been continuing since 2006-07, will be implemented by the National Bank for Agriculture and Rural Development (Nabard) and the Reserve Bank of India.

The RBI last month had asked banks, as an interim measure, to continue to give the discount on interest on short-term crop loans in 2017-18.

However, RBI governor Urjit Patel had earlier questioned the policy of loan waiver and interest subsidies. He had said “steep interest rate subventions and large credit guarantees impede optimal allocation of financial resources and increase moral hazard” and, as such, these don’t solve the sector-specific issues. Even former RBI governor Raghuram Rajan had in 2014 said interest subventions and loan waiver could distort the price of credit and also lead to misuse of such schemes. SBI chairman Arundhati Bhattacharya, too, recently said waiving crop loans disrupts credit discipline as borrowers expect more more such relaxations in future

The government has raised the farm credit target to Rs 10 lakh crore for the current fiscal, against Rs 9 lakh crore for 2016-17.

The Financial Resolution and Deposit Insurance Bill, 2017

According to a government statement, the Financial Resolution and Deposit Insurance Bill, when made into law, will lead to the repeal or amendment of resolution-related provisions in sectoral Acts as listed in Schedules of the Bill. It will also result in the repealing of the Deposit Insurance and Credit Guarantee Corporation Act, 1961, to transfer the deposit insurance powers and responsibilities to the resolution corporation.

“The Resolution Corporation would protect the stability and resilience of the financial system; protecting the consumers of covered obligations up to a reasonable limit; and protecting public funds, to the extent possible,” the government said in a statement.

The Bill aims to help maintain financial stability by ensuring adequate preventive measures, while at the same time providing necessary tools for dealing with crisis. The Bill aims to strengthen and streamline the current framework of deposit insurance for the benefit of a large number of retail depositors. Further, the Bill seeks to decrease the time and costs involved in resolving distressed financial entities, according to the statement.

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