Farm debts: A way out

The Indian farmer is distressed and half-baked measures or generous pronouncements will not do. The fall in profitability has made agriculture an unattractive livelihood for small and marginal farmers and there is a need to bring back agriculture and farmers to the centrestage of planning.

There is no doubt that the institutional credit flow for agricultural purposes expanded after the nationalisation of the banks in the Sixties, more so in the past three years. Despite this, an overwhelming number of farmer households in India have not been able to borrow from the formal institutions.

It is extremely disturbing that after nearly 37 years of nationalisation of private-sector banks and over 15 years of credit targeting for agriculture, in Andhra Pradesh and Rajasthan, the outstanding debt of farmers from all institutional sources was less than that from money-lenders. Nearly 74 per cent of loans from informal agencies are at interest rates exceeding 20 per cent per annum and over half of these at above 30 per cent.

Suggestions: Keeping in view the stress among farmers, years of insufficient public-sector investments, lack of effective risk-mitigation arrangements and decline in profitability, there is need for a one-time settlement for the bank defaulters unable to repay loans due to reasons beyond their control.

Block-level committees should be constituted to decide the relief amount on a case-to-case basis, which should be shared by the states and Centre, with the latter bearing the lion’s share.

Farming in India is mostly rainfed, and with commercialisation, the farmer is exposed to production as well as market risks. An Agriculture Risk Fund is needed to provide relief through banks to meet the additional interest obligation in case of rescheduling of loans following crop failure due to natural calamity. In case there are two failures in three to five years, the fund could be used for writing off the loan principal. This fund could be created by an initial contribution from the Central/state governments and supplemented by a small cess of say 0.25 per cent on all bank loans.

Market risks have also increased considerably with commercialisation of agriculture and increased linkage of our economy to global markets. The expert group has recommended a Price Risk Mitigation Fund. It would be better if such a fund is created at the state level so that states could quickly intervene in case of market failure of local crops. On an agreed formula, the Centre could allocate resources to states on an annual basis, which should try to build this fund over time.

The present crop insurance under the National Agriculture Insurance Scheme is neither farmer-friendly nor effective even though the Centre and states spend over Rs 1,000 crore per annum under the scheme. Moreover, farmers now need weather-based insurance products for different crops in different areas as an all-India scheme is irrelevant. The government could create a fund and partly meet the development cost of these insurance products and creation of necessary infrastructure.

There is an urgent need to introduce debt swap schemes so that the indebted farmers could borrow from banks to redeem their old, high-cost debts from informal sources. The Expert Group has suggested a provision of Rs 100 crore for the ‘Moneylenders Debt Redemption Fund’. The need is to have a much bigger fund of say Rs 1,000 crore. Further, such a scheme cannot be a one-time affair but a regular bank scheme, as the moneylenders are likely to be in business for some time.

A big problem faced by small and marginal farmers is their inability to hold their produce and its sale at low prices after harvest. The banks could consider giving pledge loans against the produce stored in the farmer’s house on the basis of documentation used for providing crop loans. As the Kisan Credit Card (KCC) has become a major instrument for financing crop loans, the banks could fix two separate limits, one for crop loans and an additional limit when the crop is harvested and is in the house.

There is also a strong need for a long-term credit policy and defining the role of agencies in the multi-agency approach of banks. It would also be desirable to have a high-powered standing committee, preferably under prime minister’s chairmanship at national level, to review the flow of agricultural credit.

Balasaheb Vikhe Patil is an MP, former Minister of State for Finance and Minister for Heavy Industries & Public Enterprises