Rural Distress: A farmer- and banker-friendly alternative to agricultural loan waivers

Rural Distress: A farmer- and banker-friendly alternative to agricultural loan waivers

The failure of populist rural credit schemes stems primarily from poor understanding of farm indebtedness in the first place.

The man who first waived: Former Deputy Prime Minister Chaudhary Devi Lal at public rally in Haryana. Express archive

From the 1970s, a lot of private investment in tube-well irrigation, farm mechanisation and allied agricultural activities took place with bank credit support. After the establishment of National Bank for Agriculture and Rural Development (NABARD) in 1982, institutional credit flows not only accelerated, but also exhibited diversification to fund livestock and horticultural along with assorted non-farm rural activities. Till around the late-eighties, agricultural credit, one could say, was largely development-oriented.

That changed first when the Janata Dal-led government in 1990, at the initiative of the then Deputy Prime Minister Chaudhary Devi Lal, announced a nationwide agricultural loan waiver (ALW). It was a watershed in transforming agricultural credit from a developmental to more of a political instrument. The 1990 ALW slowed down agricultural credit flows. A study I undertook for NABARD in 1999 linked this to bankers’ fear that waivers would breed credit indiscipline amongst farmers. It resulted in their cutting back on agricultural lending, to below even the Reserve Bank of India’s (RBI) mandated minimum 18 per cent of total outstanding advances level.

To address the situation, a Rural Infrastructure Development Fund (RIDF) was, then, set up under NABARD in 1994-95. This was followed by the introduction of the Kisan Credit Card (KCC) in 1999. This new product basically provided a revolving cash credit facility to farmers similar to that for commercial borrowers. Farmers could make any number of drawals and repayments within their sanctioned limits, conferring much-needed flexibility and operational freedom in credit utilisation. The total KCCs issued in the country reached 393 lakh by June 2004. But neither the RIDF nor KCC could be called populist interventions.

Politics and populism was, however, to soon return, beginning with the policy of “doubling of flow of agricultural credit in three years” announced in the 2004-05 Union Budget. This was furthered in 2006, with the provision of a 2 per cent interest subvention to enable farmers avail KCC loans of up to Rs 3 lakh at 7 per cent per annum. Agriculture credit flows did double between 2004-05 and 2007-08, but the then government also followed it up by granting a second ALW just before the 2009 Lok Sabha elections. This one, too, had the effect of moderating farm credit by banks. And in 2011, the Centre gave an additional 3 per cent interest subvention on KCC loans, for which farmers had made prompt repayment.


In 2012-13, the RBI modified the KCC scheme by extending its coverage to post-harvest and produce marketing expenses, working capital for maintenance of farm assets and consumption requirements of farmer households. The liberalised scope of KCC loans led to banks, particularly in the private sector, to aggressively expand their agricultural finance business even without the government’s prodding. The combination of prodding and incentivisation has resulted in the outstanding agricultural credit in India crossing Rs 10 lakh crore.

That brings us to the issue of ALWs, which have gained renewed currency after the recent Uttar Pradesh Assembly elections. The UP government’s farm loan waiver has been emulated by Maharashtra, Karnataka and Punjab, with demands for similar schemes being raised also in Madhya Pradesh, Haryana and Rajasthan.

It is pertinent in this context to understand what farm indebtedness itself is. The National Sample Survey Office (NSSO) terms all outstanding loans of agricultural households as debt. Most academic studies and media reports have also taken outstanding loans to be an indicator of farmers’ indebtedness. But from a banker’s perspective, it isn’t outstanding loans per se, but the repayment portion overdue that constitutes indebtedness. To illustrate, consider outstanding bank loans per hectare of cropped area, which for an agriculturally-advanced state like Punjab is twice the national average. While the academic and media view may see in this a sign of distress, it could also be an indicator of the higher credit-worthiness of Punjab farmers that, in turn, prompts banks to extend more loans to them. Farmer households in Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and Maharashtra are, likewise, listed as more indebted as per NSSO surveys, but from a banker perspective, these may merely reflect their better access to credit.

A more relevant indicator would be the proportion of debt to income after netting out cultivation costs. A 2014 study by Punjab Agricultural University showed the debt-to-net income ratio at 0.26 for large farmers in the state (with more than 10 hectares), while 0.34 each for medium (4-10 hectares) and semi-medium (2-4 hectares) holdings. These farmers clearly had enough capacity for repaying loans even after meeting consumption expenditures. In contrast were the small (1-2 hectares) and marginal (below one hectare) farmers with respective debt-income ratios of 0.94 and 1.42. Moreover, roughly half of the latter’s loans were from non-institutional sources, with this ratio at between a fifth and a third for other farmers.

Indebtedness, it is obvious then, is a problem more of small and marginal farmers. They are certainly deserving of support, which is possible without compromising the credit discipline of the banking system. One way is to extend more subsidies on their seed, fertiliser and chemical purchases relative to other farmers. Secondly, farmers in general — for reasons to do with tradition and dignity — are loath to working in others’ fields. Small and marginal farmers could be made entitled to wage allowance under MGNREGA for working in their own fields for a given number of days in a year. Measures such as these — in addition to providing medical insurance coverage under the Rashtriya Swasthya Bima Yojana, and improving the quality of education and health services in government schools and hospitals with a view to save on their expenses — would result in higher net income to such farmers, enabling them to service loans as well.

The above approach, focussing on improving productivity and net incomes, is far superior to the politically short-term expedient of ALWs once every decade. We must remember that all such waivers — whether in 1990, 2008 or what looks likely after 2017 — have been followed by farmers suffering credit crunch because of bankers’ fear of fresh loans turning irrecoverable.