Farm debt waiver hits bank credit offtake, fans informal loan channels

Months after Uttar Pradesh and Maharashtra announced that they would waive farm debt, Reserve Bank of India (RBI) Governor Urjit Patel had warned of the “negative side effects” of the decision such as faulty targeting of beneficiaries, incentivising wilful defaulters, and eroding credit discipline.
 
A year later, cracks in credit culture have become visible. Loans availed of by farmers for crop cultivation and allied activities have fallen short of the target set by the banks in the last two years, a Business Standard analysis of the data from respective state level bankers’ committees (SLBC) has shown.
 
Loss in credit worthiness owing to the tendency to delay repayment after announcement, lag in states’ payment towards the scheme, stringent conditions to become a beneficiary of the scheme are the major reasons for the shortfall in disbursement of bank credit to farm sector, experts said.
 
As bank credit falls, it makes way for informal credit through channels such as shopkeepers and large landowners. Maharashtra’s 2017-18 economic survey said that agricultural finance through licensed moneylenders rose about 30 per cent in FY18. Bankers said that a similar increased preference towards informal lenders is evident from this.
 
This data from SLBCs separately confirms the fact that 2017-18 saw the slowest growth of institutional credit to agriculture in almost a decade, according to RBI.
 
Even though the situation varies across states and loan types, the credit offtake swings away from the target as we near 2017-18. Against the target of lending Rs 542 billion to farmers for crop cultivation, banks lent only Rs 253 billion.

 
Commercial banks were stricter in lending than the cooperative banks according to the data. This underlines the possibility that commercial banks after loan waiver announcement were are a more precarious condition than cooperative banks post demonetisation, some bankers said.
 
“Waiver schemes incentivise default and make the defaulters ineligible for new finance. The share of new loanee farmers in any year is very low, thus reducing the overall exposure to farmers,” a banking executive in the SLBC of Rajasthan told Business Standard.
 
The scale of finance — or the loan amount eligibility — increases every year following the rise in input costs. But those farmers who do not repay after the waiver announcement become ineligible for the improved scale of finance, which further reduces the exposure, he added.
 

The lag in cleaning the balance sheets of banks puts them in a bind, since the entire population of farmers exposed to the bank’s finance stops repaying, but only a part of it gets covered in the states’ annual budget, said experts.
 
“In the 2008-09 nationwide farm debt waiver, the government intended to spend Rs 720 billion, but ended up spending Rs 520 billion, which shows that in addition to delayed funding of the scheme, government could end up spending less than the announced amount,” Ashok Gulati, a noted agricultural economist and Infosys Chair professor for agriculture at the Indian Council for Research on International Economic Relations (ICRIER) said.
 
He also said that recently, farm credit is increasingly being cornered by non-farm players such as farm produce processing companies, and that the actual credit to farmers could be still lesser.
 
Bankers from Telangana and Maharashtra, who monitor farm credit, said that farmers are misguided by political leaders at the time of waiver announcement which deviates them from repayment.
 
“With no repayment, their eligibility for interest subvention is lost. Further, they do not know that their CIBIL score is getting affected, which will reduce the scale of finance in successive years,” one of them said.

 
A research paper published by RBI in March 2017 noted that while the loan performance of distressed borrowers--whose loans have turned bad—improves by 16-20 per cent after waiver is implemented, that of non-distr4essed beneficiaries—the timely repayers — declines by 11 per cent.
 
States balance the farmers’ demand and fiscal pressures by putting a slurry of pre-conditions on the to-be beneficiaries. While Uttar Pradesh waived off loans to all farmers up to Rs 100,000, Maharashtra capped the benefit to Rs 150,000.
 
However, the conditions to avail the benefit were much more stringent in the waiver scheme of Maharashtra, bankers from both states that Business Standard spoke to suggested. While UP fell 24 per cent short of its farm credit target in 2017-18, the shortfall for Maharashtra was 53 per cent.