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LATEST NEWS UPDATES | Waiving loans doesn't end the distress -Rajalakshmi Nirmal

Waiving loans doesn't end the distress -Rajalakshmi Nirmal

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published Published on Apr 25, 2017   modified Modified on Apr 25, 2017
-The Hindu Business Line

The solution lies in better prices for produce, generating non-farm income, and reducing costs of farming

After the Yogi Adityanath government waived farm loans of about ?36,000 crore for UP farmers, pressure has mounted on other States to follow suit. But contrary to common belief, debt waivers aside from possibly guaranteeing electoral victory, do little to alleviate the plight of farmers. Neither do they help kick-start the rural economy nor spur agriculture investment. In fact, loan waivers only compound the problems faced by farmers by tarnishing their credit history and restricting access to institutional credit. Worse, they create a moral hazard by disrupting the credit discipline among borrowers.

The solution lies in offering ways to improve farmers’ income — whether through better price for produce, introducing methods to generate non-farm income, or saving on costs of farming.

In the past

The first-ever nationwide farm loan waiver was announced by the VP Singh government in 1990 at a fiscal cost of ?10,000 crore. Banks ended up paying a huge price for this as many borrowers started to default, in anticipation of more waivers. An ICRIER paper in 2015 entitled ‘Evaluation of Credit Policy for Agriculture in India’ makes a reference to the study of Shylendra and Singh in 1994 which showed that following the bailout programme, the loan recovery of Primary Agriculture Credit Societies in Karnataka fell sharply. It dropped from 74.9 per cent in 1987-88 to 41.1 per cent in 1991-92.

Debt relief packages destroy the credit culture. A World Bank research paper shows that for a standard deviation of one in bailout exposure, there is a 4-6 per cent decline in the number of loans. This study was done in 2008 after the then Finance Minister P Chidambaram wrote off a massive ?50,000 crore of farm loans. What happened after the bailout was that banks reduced exposure to districts where the write-offs were high.

Reserve Bank of India data shows that non-performing assets in agriculture for commercial banks rose after the 2008 debt waiver programme. Between 2009-10 and 2012-13, NPAs of SCBs (in agriculture) rose from ?10,353 crore to ?30,200 crore.

The claim of the supporters of the bailout programmes that it has a positive impact on rural economy is also wrong, says the World Bank paper. “We used regionally disaggregated data to test for the effect of the bailout on rural productivity, wages and employment. Our results identify a precise zero for each of these outcomes.”

The study has shown a low spending multiplier from the debt relief programme. Debt waivers are bad for everyone: those who receive debt relief as also for those who do not benefit because they didn’t have any overdue loan, says another research paper (‘Borrowing Culture and Debt Relief: Evidence from a Policy Experiment’, April 2013). The first category of borrowers become defaulters in banks’ book, and are denied loans in the future. The other category of borrowers who are discontented because they didn’t benefit the last time, build hopes for a fresh waiver and stop repayments. For fresh loans , they then borrow from the informal sector at a much higher cost.

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The Hindu Business Line, 24 April, 2017, http://www.thehindubusinessline.com/opinion/loan-waivers-dont-help-farmers-in-trouble/article9660565.ece?homepage=true


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