Economics has a way of indirectly reminding politics that life is complicated. So it is that SBI, the country?s biggest public sector bank, and the largest bank as well, has decided to stop loans for farm equipment just as the government is getting ready to instrumentalise the farm loan waiver scheme. There?s no obvious connection between the two. But studying SBI?s numbers will reemphasise the complicated nature of farm loans; complications that should have informed the waiver policy. For 2007, in the latest data available, farm loans account for a fifth of SBI?s non-performing assets. The bank has done worse than the industry average on farm loan recovery?the share of bad farm loans in NPA for SBI is about 5 percentage points higher than the figure for all public sector banks. Also, after the loan waiver announcement, loan repayment has been disincentivised. Historically, government-owned banks have had a higher share of non-performing loans in the priority sector?NPA in agriculture was about 4.4% of total outstanding agriculture credit in public sector banks, compared to 3.1% in private banks. This is a rough indication that political interference reduces credit quality. But there are also broader issues. Most recent numbers show that though NPAs continued to decline for the banking sector as a whole in 2006-07, bad loans for the agriculture sector went up from Rs 6,718 crore to Rs 7,367 crore. Clearly, there are fundamental farm economics problems that need to be solved; problems that are structural, for example, the question of increasing average size of farms.
More complication: SBI has said its credit squeeze will affect only large farmers. But the use of tractors and farm machinery like power tillers has spread in recent years. The number of users has more than doubled over the last decade. If loans for farm equipment become scarcer, second-order effects on manufacturers of farm equipment will be evident. Tractor manufacturers, for example, produce more than 2.5 lakh machines each year. There?s also the issue of farm power availability, which will be affected if machine loans are harder to come by. India?s farm power availability is 1.2 kW/ha, very low compared to South Korea?s 7 kW/ha or Japan?s 14kW/ha. Agriculture suffers from poor capital investment. But loan waivers won?t address this.
