Instead of diverting precious fiscal resources towards loan waivers, these could very well be used to reach out to the farming community at large—by creating an environment where farmers voluntarily come forward to undertake farming using modern infrastructure to command the right price and give the deserved respectability to the profession.
By K Srinivasa Rao
In order to assuage suffering of small and micro farming community, new governments are fast opting for bank loan waivers, and many states are joining the brigade. The trend is catching up as a tool for quick gratification to satisfy a wide spectrum of farm borrowers. Despite all stakeholders mindful of its ill-effects, it is used as a populist measure to attract quick public attention. In the garb of its popularity, its potential collateral damage in the long run is ignored. It may, at best, provide some symptomatic relief in the short term with imminent harmful impact in the long run. Besides creating fiscal imbalance, it vitiates the loan repayment culture, setting adverse example to next generation entrepreneurs. While the intent to repay loans is important, more significant is to understand the adverse consequences of recurring loan defaults. Encouraging loan waivers by successive leaderships builds an impression in the society that it is possible to get away by not repaying bank loans, waiting for some popular election manifestos to unveil. But it is detrimental to the effective functioning of financial intermediation and remits adverse signals to the international community.
Supporting stressed entrepreneurs: In a business/economic activity including farming, there could be a case of inability to honour debt commitments beyond the control of the borrower, for which appropriate remedies are available. Some of the economic activities for which loans are availed could turn unviable due to genuine external factors/natural calamities or adverse business cycle. It could lead to loan default. In such situations, banks handhold borrowers by supporting entrepreneurs till a favourable situation restores. It could be by restructuring loans by providing (i) extended holiday in repayments, (ii) downsizing rigour in the terms of loan repayment, (iii) providing some add-on limits to meet emergent situations, (iv) reducing margins, and (v) even resorting to fine-tuning interest rates during stress period to ease burden. The support structure in times of stress must be to bail out such borrowers and make the unit restore its full functionality so that, eventually, incremental rise in its revenues are sufficient to service bank loans. But it is ensured that, in the whole rescue process, the entrepreneurs under stress cannot abdicate responsibility to work towards restoring operational viability of the unit.
Weed out wilful loan defaulters: In order to protect the sanctity of debt contract and ensure effective lending operations in banks, it is necessary to lend credence to prompt borrowers who repay loans on time. But in the case of farm loan waivers, there is no scope to differentiate between wilful defaulters and genuinely stressed borrowers. The blanket loan waiver puts genuine borrowers who have repaid loans on time in a spot. They begin to feel marginalised, particularly when wilful defaulters are given relief without any consideration of their ability to repay loans, but reluctant to repay to take advantage of loan waivers. The reason for small farmers’ distress is well known. Their farming activity, per se, is non-viable. There is hardly any incentive to pursue farming despite interest rate subvention and fertiliser subsidies. The need and the focus should, therefore, be to make farming activity viable and sustainable in the long run, and developing a strong ecosystem rather than providing random alms by way of loan waivers. If loan waiver is to be made a genuine compensation for farm distress, it should be able to weed out wilful defaulters from beneficiaries’ list.
Crux of farm distress: The logical need for farm loan waiver arises out of farmer distress. Even the concept of providing enhanced minimum support price (MSP) is not reaching the target group of distressed farmers. Practically, they are forced by social circumstances to sell their produce to middleman and landlords who wield greater power in the hinterland. Moreover, it is difficult for small farmers to reach big grain markets to get the right price. Having already borrowed from landlords at usurious interest rates, their produce go, at times, at throwaway prices to these village muscle-men. Many of these practices, well in the knowledge of village panchayats and henchmen having an umbilical connect with the government, opt not to help resolve endemic farmer distress. Rather, they fathom easy methods to propagate temporary merits of loan waivers.
In the long-term interest of farming activity, it is necessary to conduct field-level research to understand the actual reasons that make farming non-remunerative and address them with appropriate policies and implementation strategies. There is a wide gap between policy intentions and their end-state outcome. The classic example is the intention to provide 150% of input cost as MSP. But is it possible to deliver it without inclusive participation of every stakeholder in the value chain? Whenever supply of particular farm produce exceeds demand, farmers will be in an anxiety to get cash at whatever price, rather than able to dictate price to buyers. These are the practical difficulties in providing remunerative prices to farmers. Going forward, there has to be a strong network of government agencies/NGOs willing to help farmers get the right price to ameliorate their suffering. Farm suicides are not due to lack of policies or good intentions of the government, these are more due to the inability to make policies work for the really deprived, distressed farmers. Perhaps loan waivers will not be able to solve the problems of farmers.
The way forward: In view of these facts, loan waivers can never be a panacea against farm distress. These can, at best, be a band-aid trying to treat symptoms without delving deep into the malaise that has infested the farming community in a big way due to the protracted negligence at the grass-roots level. It is not possible to force farmers to undertake business that does not pay for itself, leave alone ensuring their prosperity any time soon.
Another test of robustness of farming ecosystem could be the capital investment in farming. The statistics of flow of funds to the farm sector indicate that over 70% of it goes to working capital as crop loans. There is complete lack of concentration on developing farming infrastructure such as irrigation network, innovation in seed quality, irrigation technology, use of non-conventional energy, improvement in pest control methods, protection against global warming, and farmers’ education.
Instead of diverting precious fiscal resources towards loan waivers, these could very well be used to really reach out to the farming community by creating a compatible environment where even the new generation farmers will voluntarily come forward to undertake farming using modern infrastructure to command the right price and respectability to the profession. It is, therefore, necessary to think beyond debt waivers to address farm distress.
The author is director, National Institute of Banking Studies and Corporate Management, Noida. Views are personal.