Farm loans: Who, how much and waiver worries — all your questions answered

The Indian Express explains how RBI defines farm credit, how it’s disbursed and the dangers of writing off loans.

Written by Shaji Vikraman | Updated: June 14, 2017 8:44 am
farm loan, farmer loan, RBI, farm credit, what is farm loan, farmer loan waiver, loan waiver, reserve bank of india, indian express news, explained, india news Agriculture is in the priority sector of lending, with 18% of bank credit earmarked for it. File photo

What are farm loans?

Lending to the agriculture sector by banks and institutions in India is not just about providing funds to farmers who want to grow crops. Farm credit, going by its definition spelt out by the Reserve Bank of India, includes short-term crop loans and medium-term or long-term credit to farmers. Short-term crop loans are basically borrowings by farmers for six months or a maximum one year to help them raise money before and after harvest. So, banks disburse loans for a range of activities such as buying fertilisers, harvesting, spraying, sorting, grading and transportation of produce to the nearest market. These could be for farmers who are into traditional farming which include a range of crops including sugarcane and pulses besides plantations like tea, coffee and rubber and horticulture. For other activities such as irrigation and farm development or buying of equipment, lenders provide loans for a longer period — for more than a year.

Are other segments of lending by banks classified as loans to the farm sector?

Yes. For instance, banks offer loans for construction of storage facilities — warehouses, godowns and silos, market yards, cold storage units — and for soil conservation and watershed development, seed production, bio-pesticides and plant tissue culture. Though these fit into the broad definition of lending to the farm sector, these are classified as agri-infrastructure loans. Apart from these, there also is lending for ancillary agricultural activities — such as agri-business centres, agri-clinics, food and agro-processing, to customer service units managed by individuals or institutions who maintain a fleet of tractors, bulldozers etc.

Are banks obliged to lend to farmers?

Yes. Starting from the time when the farm sector contribution to GDP or national income was high, policymakers set out mandatory lending targets for banks. In categories defined as priority sector for lending, agriculture is virtually at the top besides small and medium enterprises and housing, export, education and social infrastructure. So 40% of bank credit has to be earmarked for the priority sector with a target set for foreign banks in India too. Within this, there is a sub-limit of 18% for agriculture. Even within this 18%, the RBI has set a target of 8% for small and marginal farmers. Lenders who fail to achieve this target will have to contribute to the Rural Infrastructure Development Fund or RIDF, handled by the central government for making good the shortfall.

Who qualifies as a small or marginal farmer?

For the purpose of lending, a marginal farmer is defined as one with a landholding up to one hectare, while small farmers are those whose landholding is between one and two hectares. It also covers landless agricultural labourers, tenant farmers and sharecroppers, besides self-help groups or groupings of individual small and marginal farmers in agriculture and allied activities.

How much can banks lend to these individual farmers, corporate farmers, cooperatives, farmers’ organisations?

For farmers, lenders can go up to Rs 50 lakh backed by pledge or hypothecation of their produce for a period not exceeding 12 months.

For corporate farmers, cooperatives of farmers and other organisations that are into dairy, fishery, animal husbandry, beekeeping, sericulture and the like, the aggregate limit is Rs 2 crore. For agricultural infrastructure, the borrowing limit is way higher — Rs 100 crore for a borrower. Among ancillary agricultural activities, the loan limit for disposal of farm produce has been pegged at Rs 5 crore for farmers’ cooperatives, while for food and agro-processing it can go up to Rs.100 crore for each borrower.

Is there a cap on interest rates on banks set by the regulator or the government ?

Banks have to lend at a maximum rate of 7% to farmers with the government offering a subsidy of 3% to borrowers who are prompt in repayment. What the government, which controls a large number of state-owned banks, does is subvention or in other words compensation to banks for lending at such low rates.

So why is there competition among state governments to write off farm loans?

It is not just state governments but also successive central governments that have waived farm loans. It may be a political move but in many cases, farmers have been unable to repay because of crop failures or when there is a bumper crop — as has been the case this time and they have to reckon with low prices offered for their produce, including what is called the minimum support price or MSP. In Maharashtra for instance, where the state government has announced a blanket loan waiver of Rs 30,000 crore, the trouble is that it has to content with lower price realisation after two successive years of drought, and after having had to struggle to raise money during the sowing season because of demonetisation.

What is the worry in such loan waivers?

Bankers and economists complain that such a write-off encourages a culture of indiscipline among borrowers. What this does, they say, is promote moral hazard, or in other words it leads to a practice of other borrowers choosing not to repay in the hope of similar loan waivers in the future. RBI governor Urjit Patel had voiced concern earlier about how such loan write-offs undermine an honest credit culture and lead ultimately to a higher cost of borrowing for other borrowers. Besides that, the larger worry is of the fiscal health of state governments or their finances. That’s because the write-offs will not be funded or supported by the central government, as Finance Minister Arun Jaitley said Monday, although Prime Minister Narendra Modi had made an announcement earlier in the run-up to the polls in Uttar Pradesh.

It will mean that each state will then have to find the resources or money to fulfil such promises, which in turn means higher borrowings and perhaps lower spending on development or infrastructure.

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  1. R
    Jun 14, 2017 at 4:32 pm
    Reinstate the subsidies for farmers -pulses,vegetables, es-cardamom,pepper,ginger, coffee,Tea etc. They r suffering . IAS People can't understand the pain of common man
    1. K
      KRavindra Ballal
      Jun 14, 2017 at 1:00 pm
      Besides the 7 percent concessional rate of interest the farmer who repays his loan promptly as per repayment schedule fixed by the bank is also eligible for additional 3 percent by way of interest subvention .Hence a farmer repaying his short term credit on time will be in effect paying 4 percent per annum only.It may also be noted that many state governments announce interest rebate to farmers who borrow through co operative societies.
      1. Anurag Srivastava
        Jun 14, 2017 at 9:47 am
        Farmers loan is nothing but the loan taken by the farmers not for going crops but for purchasing jewelry other items for the performance of the marriage of the daughters marriage and also for boozing. The farmers of the country go in for wrong methods of cropping. They do not study their soil and crop market. Hence, their crop fails.
        1. M
          Jun 14, 2017 at 8:23 am
          RBI not revealing the names of these 12 High end defaulters. Kisan defaulters are being shot dead by BJP Govt. Corporate defaulters being given escape route through a new Act inacted by BJP Govt. A news says that RBI is moving to resolve the bad loan crisis with an Internal Advisory Committee (IAC) of the RBI having identified 12 accounts of corporate borrowers who owe over Rs 5,000 crore each — and overall involve an amount of close to Rs 175,000 crore — for insolvency proceedings under the newly enacted Insolvency and Bankruptcy Code 2016 (IBC).The RBI committee has recommended for IBC reference all accounts with fund and non-fund based outstanding amounts in excess of Rs 5,000 crore, with 60 per cent or more (Rs 3,000 crore or more) classified as non-performing by banks as on March 31, 2016.“The IAC noted that under the recommended criterion, 12 accounts adding up to about 25 per cent of the current gross NPAs of the banking system would qualify for immediate relief under IBC,”
          1. A
            ashok s
            Jun 14, 2017 at 6:35 am
            Waivers are not solutions . govt has to fund farmers thru equity route . a forward future n options is another one solution ,which will helpffarmers to raise capital without risk . insurance is also protective method ,which should be mandatory for farmers
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