The truth about farm loan waivers: Financial Express 4th November

 

Farm loan waivers are customised schemes announced by states to help the peasants. The quantum announced is impressive, but the actual amount disbursed is much lower. Further, it gets spread over a period of 2-5 years for a variety of reasons. If waivers are bad and create a moral hazard, doesn’t the same principle apply to NPAs that are finally written off?

One, there has to be fiscal space available. Two, the schemes need to be designed and implemented, and this involves identifying the beneficiaries.

The issue of farm loan waivers is debatable, and it is generally felt that these should be eschewed. The RBI’s report on state finances gives an update on these schemes, which is interesting as it reveals some important facets of these schemes as implemented by states.

The first is that when such measures are made public, they have strong ‘announcement effects’, where there is umbrage and praise depending on which side of the table one is sitting. Critics including some former governors of RBI feel that such schemes create a moral hazard as it provides an incentive to farmers to not service their loans while penalising those who pay on time. The votaries of such schemes defend the same on grounds that this poor class requires protection from servicing of debt at a time when the monsoon fails, and the resulting drought drives them to penury and, at times, to suicides.

The numbers are meant to be impressive to create an impact especially if such schemes are announced just before or after elections or when there is severe farmer distress that goes along with droughts in specific states. Interestingly, in the last six years, only 10 states have gone in for such schemes, with Jharkhand being the 11th in 2020-21. These are Andhra Pradesh, Telangana, Tamil Nadu, Maharashtra, Karnataka, Madhya Pradesh, Chhattisgarh, Rajasthan—which are prone to monsoon failures—and Uttar Pradesh and Punjab.

The second is that, since 2014-15, a total of Rs 2.31 lakh crore of waivers have been announced by all these states, with Maharashtra having three rounds in fiscal 2018, 2020 and 2021. In 2017-18, Rs 80,000 crore was announced by the three states of Maharashtra, Uttar Pradesh and Punjab. This was bettered in 2018-19 by the four states of Madhya Pradesh, Rajasthan, Karnataka and Chhattisgarh (all after elections) for Rs 1.04 lakh crore. Therefore, it can be concluded that farm loan waivers of this scale are more of a recent phenomenon. It also reflects the changing weather conditions where droughts have tended to become more frequent and localised, thus affecting certain communities.

The third is that while announcements are made in a year that has the announcement effect, the actual spread of the same is over a period and can stretch for 3-5 years. This is because of two reasons. One, there has to be fiscal space available. Two, the schemes need to be designed and implemented, and this involves identifying the beneficiaries.

The fourth is that the final amount disbursed as a proportion of the announced amount tends to be much lower. For example, Uttar Pradesh had announced about Rs 36,000 crore, and in four years has covered around 70% of the target. Maharashtra’s big bang announcement of Rs 34,020 crore resulted in just Rs 18,540 crore being disbursed for two years, with no expense in the last two years. Therefore, there is a difference between announcement and actual outlay.

Besides the sincerity of the state concerned, there are also issues in identifying the farmers as there are cut-out thresholds that must be adhered to, which probably keeps out a large section of the borrowers. It could be specific to crops in specific regions, which again filters out the beneficiaries. There needs to be proof that the monsoon failed in certain villages and the panchayat must testify the same. At times, it is made conditional where the farmer must repay some part of the debt to avail of this facility.

This leads to exclusion of several farmers from the scheme. Madhya Pradesh made an announcement of Rs 36,500 crore in 2018-19 and, so far, there has been no outlay in any of the three budgets. Hence, reading into the numbers is important as the amounts spoken of may not result in significant action taken by the state. Andhra Pradesh, for instance, had announced Rs 24,000 crore in 2014-15, and in the last six years has just about spent 50% of this amount.

Hence, when such loan waivers are announced, the amounts spent must be evaluated. Besides logistics issues, often fiscal constraints come in the way of the states providing for the same, which elongates the time period and often a good monsoon in the subsequent year puts the issue of waiver on the backseat. The highest provision made by all the states in their budgets for farm loan waivers was in 2017-18, for around Rs 50,000 crore, which was 1.8% of total expenditure that year (Rs 27.71 lakh crore).

Given that the ongoing pandemic has led to a lot of allowances being made by the government for the borrowers—ranging from moratorium to payback of ‘interest on interest’ to restructuring of loans—the concept of waivers is probably more common today, albeit in different forms. While all waivers are finally paid by the government through budgetary allocations, non-performing assets (NPAs) in the banking system are more serious as they are losses for the institutions and come in the way of returns to their shareholders.

In this context, it would be compelling to compare the write-offs in the banking system with the waivers that are extended, with the government paying banks for a default. The accompanying table shows the total write-offs by public sector banks in the five-year period ending 2019-20, and juxtaposes the same with the waivers given that apply to loans given by public sector banks.

The distress in the business community has been increasing over the years, as has the need for governments to support farmers. Both sets of loans would come under NPAs. The difference is that when farmers are unable to pay and the government steps in, there is solace for banks as the asset is moved out of the book as it is fully serviced. In case of non-farmer loans where there is no such waiver, the loss is directly on banks. Banks can first call such loans NPAs and make provisions for the same. When loans cannot be serviced for sure, write-offs need to be made, which takes loans off the books.

The ideological question that is raised is: If waivers are bad and create a moral hazard, doesn’t the same principle apply to NPAs that are finally written off? In fact, it is argued that waivers are from government funds that are collected in normal course, while write-offs are from deposit-holders’ savings. The current restructuring exercise that will be undertaken can be for Rs 3-5 lakh crore. Restructuring of loans invariably involves lowering of interest rates and elongating the tenure of the repayment schedule.

There is finally a cost that is borne by the bank in terms of both direct interest income and opportunity cost of deploying the funds. Hence, in this vein, the argument is that waiver is superior to a write-off, although finally everything is coming from the taxpayer.

To conclude, it should be said that farm loan waivers are customised schemes announced by states to help the peasants. The quantum announced is impressive, but the actual amount disbursed is much lower. Further, it gets spread over a period of 2-5 years for a variety of reasons. One cannot be judgmental on the same as there are similar acts of write-offs on commercial loans where deposit-holders bear the cost. Looked at this way, they may not really be out of place and do serve the good of the weakest section of society.