Uttar Pradesh’s local news outlets such as Jagran, News 18 Hindi and even News NCR recently reported the state government’s intentions to waive loans of over 33,000 farmers amounting to ₹ 200 cr. However, wisened by their previous encounters with the regime, local farmer leaders accused the administration of making tall claims.

According to News NCR, the Agriculture Department is sending a detailed proposal to Chief Minister Yogi Adityanath to waive the loans of 33,408 farmers who have been waiting for such relief for five years. If approved, the loan waiver will provide relief for farmers in 19 districts. The same will be implemented under the State Government Crop Loan Redemption Scheme 2017 started on July 9, 2017. The scheme waives loans upto ₹ 1 lakh for small and marginal farmers.

Bharatiya Kisan Union (BKU-Shamli) leader Ompal Malik told SabrangIndia that at the time nearly 3,000 farmers in Lucknow were excluded from the list of eligible candidates. “Farmers who in 2017 had loans less than ₹ 1 lakh continued to receive interests. Now some of their loans exceed 1 lakh,” said Malik. As for the latest update, he said no BKU farmer has received any update regarding this announcement. He accused the state government of repeatedly making such announcements without a proper plan of action.

Similarly, another SKM leader of the UP unit, Manish Bharti, said that no farmer, regardless of the size of farmland, has received any information on loan waivers for many years. Instead, many farmers are being asked for loan payment recoveries in Meerut. “They mention 19 districts but don’t specify which regions. All of this shows that they only want to give speeches to placate us. This government is making fun of farmers,” said Bharti.

Is loan waiver truly beneficial?

A NABARD research study ‘Farm Loan Waivers in India’ published on April 22 stated that ‘indebtedness’ is a result of distress and not the immediate cause. An inability to earn enough income indebts a farmer. Recurrent losses and falling margins results in defaults which leads to a vicious cycle of debt- distress- further debt.

“Farm loan waivers (FLW) were designed as a reaction to acute agrarian distress and to ensure the continuity of future credit, but it has tacitly evolved to emerge as a political tool that is strategically used by political parties to influence rural voters,” concludes the study by Shweta Saini, Siraj Hussain and Pulkit Khatri.

It observed that the year wherein an FLW is implemented, the government reduces capital expenditure. Similarly, financial institutions reduce lending and there is worsened credit discipline among farmers in the medium to long run.

Moreover, researchers saw that FLWs only address indebtedness and not the original causes of distress like lack of remunerative prices. As a result, the schemes serve as temporary relief during which farmers incur more debt.

“In such a scenario, a farm loan waiver only proves to be a ‘jury-rigged expedient’ — a quick fix that requires recurrent application,” says the study.

Seeking to understand the political impact, the study said that only 4 out of 21 political parties in the last 30 years lost the election following promises of FLW implementation. These parties included the Samajwadi Party in Uttar Pradesh in 2017.

A related study by Phadnis and Gupta in the report said that all political parties, left-wing, right-wing and centrist parties alike, announce FLWs. Moreover, most waiver schemes were announced by states who could afford the waiver fiscally. After 2016, high fiscal debt did not deter several states from announcing waivers. Another observation was that waivers were announced regardless of droughts in the area, a proxy for farmer distress.

“The timing of waivers was found to be an important factor determining the correlation between waivers and electoral wins – proximity to elections mattered. The closer the announcement of waiver was to elections, the greater was the political mileage gained by parties,” says the study.

Related:

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UP Assembly Elections: Farmers dealt a mighty blow to the BJP in some constituencies

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Women say that although they have received the gas cylinders, it was not sooner than 15 days ahead of the elections.

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Delhi: Farm loan waivers by state governments engender heated media debates and thus loom large in public consciousness, while use of government funds to infuse fresh equity into government-owned banks following large defaults by corporate borrowers goes nearly unnoticed.

This is unwarranted, the data show. The scale of the corporate non-performing assets (NPA) problem is of a higher magnitude, and corporate defaults have cost the public exchequer more than farm loan waivers. If recapitalisation of banks is welcomed, a farm loan waiver should be as acceptable.

In the financial year 2017-2018 and to date, 10 state governments have announced farm loan waivers totalling Rs 184,800 crore.

In contrast, the total debt of India’s top 10 corporate borrowers alone was nearly four times that amount, at Rs 731,000 crore as of March 2015, and of the top 12 NPAs nearly twice, at Rs 345,000 crore.

Data show that the percentage of impaired loans in agriculture has been far lower than that in industry.

Expensive for the exchequer
Total gross bank credit (the amount in loans disbursed to companies or individuals from the banking system) was Rs 71.5 lakh crore as of March 2017, and Rs 77 lakh crore as of March 2018, according to a Reserve Bank of India (RBI) report in December 2018.

Of this, agricultural credit was Rs 10 lakh crore for each period, making up a 13-14% share, on average, in overall bank credit.

Total credit to industry was at Rs 26-27 lakh crore during each period, amounting to a share of 35% in overall bank credit. Within this, loans to large borrowers–who the RBI defines as receiving loans larger than Rs 5 crore–amounted to Rs 22 lakh crore each year.

More specifically, total credit to the top 10 corporate borrowers as of March 2015 was Rs 7 lakh crore, accounting for 10-14% of total bank credit, and 27% of total credit to industry, as per a research report by international financial services company Credit Suisse.

For the same period, the total credit to agricultural and allied activities was Rs 7.7 lakh crore–the entire agriculture sector owed the banking system the same amount borrowed by the top 10 Indian corporate borrowers.

Total gross NPAs in Indian banking were Rs 8 lakh crore and Rs 10.3 lakh crore as of March 2017 and March 2018, respectively, according to RBI data.

The share in NPAs of large borrowers has been increasing over time, with a share in total advances (lending by banks) of 40%, and a share in total stressed assets (including NPAs, restructured loans and assets written-off by banks) of 70% at the end of March 2017.

Share Of Large Borrowers In Total Advances And Indian Banks’ Stressed Assets

Source: Reserve Bank of India, April 2018

Among NPAs in the banking sector, the top 12 which make up approximately 25% of total NPAs were identified and referred to the National Company Law Tribunal (for resolution and recovery) by the RBI in 2017. Of these, four have been resolved within a year with about 52% of their dues recovered. This recovery represents only 14%, or Rs 48,300 crore, of the total Rs 345,000 crore owed from all 12 NPAs. Thus, about Rs 3 lakh crore remains outstanding from just eight corporate NPAs–nearly double the total farm loan waivers announced by the 10 states.
 

Source: Insolvency and Bankruptcy Board of India Quarterly Newsletter, Oct-Dec 2018

Upon further research, we see that for a group of other large exposures (or total loans to a particular entity, for our purposes defined as higher than Rs 1,000 crore), recovery of dues has been to the extent of 30%.
 

Source: Compiled from Insolvency and Bankruptcy Board of India Quarterly Newsletters

The amount written off by banks for just five corporate NPAs is thus Rs 11,106 crore–more than the combined farm loan waivers in two states, Chhattisgarh and Andhra Pradesh.

Farm loans for corporate activity in farming sector and to large borrowers
While popular opinion on farm loan waivers vilifies the poor and marginal farmer, small farmers benefit the least from agricultural credit since they borrow largely from informal sources such as moneylenders. Therefore, these farms do not benefit from loan waivers announced by governments that are not applicable to non-formal sources of credit.

Agricultural credit in India is now mainly large-ticket (of larger loan amounts) and goes towards corporate activity in the farm sector, as data show. The share of high-value loans (above Rs 10 lakh) increased from 4.1% in 1990 to 23.8% in 2011 of all ‘direct’ agricultural credit, which goes directly to people/institutions directly involved in farming and allied activities (as opposed to, for instance, funding for further lending by cooperatives or to state electricity boards for provision of electricity to farmers). The share of small loans (Rs 2 lakh) decreased from 92.2% to 48% in the same time period.

Sources: Economic Survey, 2014-15 and Review of Agrarian Studies, Feb-Jun 2014)

The RBI revealed that public sector banks (PSBs) had handed out Rs 58,561 crore to 615 accounts in agricultural loans in the year 2016, in response to a Right to Information application filed by The Wire. This averages out to more than Rs 95 crore in agricultural loans to each account.

It is actually corporate borrowing that has spurred the growth of agricultural credit in India, thanks to the RBI mandate that 40% of banks’ lending (or ‘adjusted net bank credit’) must go to to priority sectors of the economy, with a sub-limit of 18% for agriculture. Strong growth in bank credit to industry and other segments of the economy has, as a by-product, led to the growth of agricultural credit.

Not only is the growth of agricultural credit mainly in the big-ticket segment, two other things stand out: Most agricultural credit is disbursed just before the end of the financial year for banks to meet their priority-sector lending targets–and is as such off-season credit that does not really help farmers–and an increasing and large proportion of agricultural credit is disbursed via bank branches in urban India, according to a paper by R. Ramkumar and Pallavi Chavan published in the Review of Agrarian Studies in 2014. Agriculture-related disbursals for meeting targets, which largely go to corporate activity in the farm sector, do not help the real small farmer.

The increasing and large percentage share of big-ticket loans in agriculture does suggest that the corporatised ‘farmer’ is enjoying the benefits of the way the regulator has incentivised the banking sector. On the other hand, the small and marginalised farmer now depends heavily on non-institutional and expensive forms of credit. As the chart below shows, over-dependence on usurious finance for small/marginal farmers is reflected in the very low (14.9%) share of access to institutional credit of farmers with land holdings smaller than 0.01 hectare.

Why farmers’ situation is more precarious than big businesspersons’
A key underpinning of bankruptcy procedures is the limited liability clause that protects the assets of promoters unless explicitly pledged. Corporate bankruptcy, therefore, is a simultaneous process of cleansing bank balance sheets and a mechanism allowing optimal risk-taking by entrepreneurs. Entrepreneurs can come out of bankruptcies with their personal assets unscathed, whereas a farmer who loses a crop–due to unfavourable weather conditions or a price crash–can lose everything.

A farm loan waiver is a sector-wide extinguishing of loans mandated by the government, usually after an election to fulfill a poll promise, with the exchequer compensating banks. Although corporate NPAs do not normally entail government obligation (unless NPAs originate in public sector banks or are due from public sector corporations), the exchequer gets involved when conditions warrant that the state must indirectly bear the burden of corporate NPAs by infusing funds into banks–as is happening now in India, and happened in the US following the 2008 financial crisis.

Equivalence can also be drawn when the problem of corporate NPAs repeats itself in the same sectors, implying that banks keep lending to the same sectors even in the absence of structural improvements.

Lack of structural changes
Cases in point are persistent problems in the power and infrastructure sectors. We looked at RBI data on segment-wise performance of exposures of banks to address this question. We analyse two time periods: The position as of March 31, 2001 and then the position between the period March 2009 and March 2013. Contributions to total gross NPAs of the banking sector by large industries, medium industries and agriculture as of March 2001 were 21%, 15.8% and 13.3%, respectively.

Source: Muniappan (2002), RBI Deputy Governor at CII Banking Summit 2002 on April 1, 2002
 

Source: Reserve Bank of India

Of the top 10 borrowers in the Indian banking system, even if one excludes Reliance ADAG and Videocon (the latter does have substantial interests in infrastructure and mining), all others have businesses primarily in pure infrastructure and heavy industries.

Next, for industries (overall) and agriculture, we consider the movement in percentage of total impaired asset ratios between 2009 and 2013. Around 10.2% of all loans to industries were impaired in March 2009 and this increased by 5.8 percentage points to 16% by March 2013 (and the position has only worsened after 2013 as shown by the table). For agriculture, 5.4% of exposure of the banking sector was impaired as of March 2009 and this worsened by 2.8 percentage points to 8.2% in March 2013. As is evident from the data, the percentage of impaired assets in agriculture has been far lower than that in industry.

The then RBI Governor, YV Reddy, in a speech delivered at the National Institute of Bank Management, Pune, on January 6, 2004, had acknowledged that banks followed a sort of rule in lending: Small industry loans at 11%, agricultural loans at 10% and industry loans at 7%.
This means that the credit quality (the principal criteria for judging a company’s creditworthiness or risk of default) of large corporate borrowers is not superior to that of agriculture/priority sector lending. Interest rates charged by banks from large corporate borrowers are therefore incommensurate with the risks involved.  

How policy has played a role
Policy has focused on keeping food prices low for consumers through restrictions on farmers and subsidies to consumers. The average yearly revenue lost by Indian farmers between 2014 and 2016 on account of export restrictions, after deducting the subsidies they received, was Rs 1.65 lakh crore, as per the Organization for Economic Co-operation and Development.

This model of development is no longer tenable, many experts and policy-makers concur. First, India can no longer rely only on exports and must ramp up domestic demand to power its growth. And skewing income distribution away from a sector which employs 42% of India’s workforce will not help. Second, cities are unable to manage the influx of refugees from agriculture, so farms have to be made more productive and remunerative. Third, the Swaminathan/National Commission on Farmers report of 2006 clearly states that India’s food security cannot be achieved through imports, thus emphasizing the imperative of a healthy agricultural sector. Finally, from an ethical point of view, taking care of the big farmer who, unlike the corporate promoter, risks losing personal assets in the event of a default, is as important as taking care of the big businessperson.

In sum, structural problems in both the agricultural and corporate sector must be addressed with equal urgency. Empathising with the corporate sector for its woes while deriding the farm sector for its alleged profligacy is a recipe for pitting town versus country in a battle that no one can win.

(Prasad is a professor at Management Development Institute, Gurgaon and author of Blood Red River; Gupta is a banker with an interest in economic development.)

We welcome feedback. Please write to respond@indiaspend.org. We reserve the right to edit responses for language and grammar.

Courtesy: India Spend.com

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In the decade to 2016, non-priority sector bad loans rose more than 22-fold (2166%) from when they were valued at Rs 18,300 crore in 2006. During the same period, the sector’s share in public sector banks’ NPAs rose from 44.2% to 76.7%. This growth was particularly pronounced after 2011–12-fold (1110%) in five years.
 
Public sector banks’ bad loans in the priority sector–which includes loans for agriculture, micro and small enterprises (MSMEs), small-scale industries, education, affordable housing and renewable energy–also grew during the same period, but slower. These grew five times (465.8%) from Rs 22,200 crore in 2006 to Rs 1.25 lakh crore in 2016, although their share in the total NPAs of public sector banks shrank by more than 55% (thanks to the growth of non-priority sector NPAs).
 

Source: Reserve Bank of India
 
Agriculture-related bad loans, valued at Rs 48,467 crore, comprise the third largest NPAs, after corporate NPAs (Rs 3.16 lakh crore) and MSME NPAs (Rs 74,051 crore), according to this 2016 Lok Sabha reply.
 
“For non-priority loans, NPAs result when business models go wrong. They are normally linked to sectors rather than individuals–which is the case of farm loans, where the monsoon plays an important role,” Madan Sabnavis, chief economist of Credit Analysis & Research Ltd, a ratings agency, told IndiaSpend. “An economic downturn increases chances of NPAs as companies cannot service their debt. When there is no malafide intent or managerial incompetence, it is mainly such external conditions that lead to corporate NPAs. For farm loans it is more straight-forward and linked to monsoon,” Sabnavis said.
 
RBI officials refused to comment for this story.

 
85% jump in write-offs as NPAs eat into banks’ lending capacity
 

Source: Reserve Bank of India
 
As of March 2016, 7.5% of all lending in India–by public, private and foreign banks, to both priority and non-priority sectors–amounting to Rs 6.1 lakh crore had become non-performing assets. This is more than twice the union budget for defense at Rs 2.6 lakh crore in 2017-18, which received the highest allocation among all central ministries this year.
 
This is the highest recorded gross NPA ratio in the last 10 years, RBI data show. Prior to 2014, the ratio typically remained below 4%.
 
Such high NPA ratios limit banks’ ability to lend money to productive sectors.
 
An asset quality review introduced in April 2015, through which the RBI forced banks to finally recognize their stressed assets as NPAs and record them as such on their balance sheets, was the key reason why NPA ratios apparently rose from 2014-15 onwards.
 
The review unearthed numerous cases of loan “restructuring”–giving the borrower some concessions to avoid a default–and dressing up of account books. Over a decade, NPA write-offs jumped 85% from Rs 8,799 crore in 2006 to Rs 59,547 crore in 2016, according to this 2016 Lok Sabha reply.
 
The trend is significant, a former senior RBI official told IndiaSpend. “All provisions against write-offs eat into the capital of the bank, reducing its capacity to lend. The sharp slowdown in credit growth over the past couple of years is significantly attributable to banks’ unwillingness to take on any further risk of write-offs, which would reduce their capital even further,” the official wrote in an email, requesting not to be named. From a policy perspective, he explained, to sustain nominal GDP growth of 12-13 per cent, credit should grow at least at that rate, if not faster. (Nominal GDP is estimated at current prices, not taking inflation into account, while real GDP is estimated at constant prices after accounting for inflation.)
 
This is evident from the waning stream of credit advances to both priority and non-priority sectors in recent years. While the volume of credit has risen in absolute terms, its year-on-year growth has slowed, RBI data show. Growth of lending in both sectors slowed by more than 35% — from 19.3% in 2013 to 12.4% in 2016 in the priority sector, and 11.2% in 2013 to 7% in 2016 in the non-priority sector.

Source: Reserve Bank of India
 
“If [bank] capital is being eroded by loan losses, infusions are needed, either from the government or from the market. Neither is looking feasible at the moment. So, sooner or later, slow credit growth will impede GDP growth,” the former RBI official said.

 
Commercial banks’ aggressive long-term lending caused the NPA problem
 
Most of the experts IndiaSpend spoke to for this story agreed that much of the NPA problem arose when commercial banks lent aggressively, for long durations, to the non-priority sector in the early 2000s, when the economy reached a growth rate of over 9% in 2005-06, 2006-07 and 2007-08.
 
“About half the NPAs in the system are in the infrastructure sectors. A substantial portion of the remaining are in sectors such as steel, which have been subject to various business shocks. These are mostly loans for capital expenditure and are long term,” the former RBI official told IndiaSpend. “Priority sector loans, on the other hand–crop loans, for example–are more often short-term loans for working capital purposes,” he explained.
 
The global economic slowdown of 2008 ushered in a prolonged period of uncertainty in India as elsewhere. Exports fell, some mining projects faced regulatory bans, sectors such as power and iron and steel faced difficulty getting permits, raw material prices fluctuated and infrastructure projects faced power shortages. All these factors, coming on top of aggressive past lending by banks, caused NPAs to swell, Finance Minister Arun Jaitley told the Lok Sabha in 2016.
 
During the early 2000s, when banking reforms were gathering pace, development finance institutions (DFIs) such as IDBI, ICICI and IFCI began to lose ground. DFIs had been created to provide medium- to long-term credit for industrial projects, and supplement commercial banks’ offering of short-term credit for working capital.
 
Initially, the government made low-cost capital available for DFIs, but withdrew subsidized funding in the early 1990s, leaving DFIs to rely on capital markets to raise funds. Further, a significant chunk of their loans to projects in the steel, textiles and basic chemicals sectors, among others, began to experience delays and cost escalations, turning loans into NPAs, as this Hindu Business Line report from January 2002 explains.
 
When DFIs consequently hiked their lending rates, they became uncompetitive against commercial banks that were now rapidly increasing their long-term portfolios as post-liberalization reforms had opened up the banking sector to private and foreign players.
 
“Since 2002 commercial banks started lending more long-term loans compared to earlier when the bulk of their lending was short-term–working capital and trade credits,” Pronab Sen, country director for the India programme of the International Growth Centre, a New Delhi-based think-tank, told IndiaSpend. “In 2002, short-term credit accounted for 73% of bank loans–this is down to 45% now.”
 
As of March 2016, medium- and long-term loans had touched almost 50% of total loan portfolio, according to this Hindu Business Line report from April 2017.

 
Share of corporate bad loans rose 67% after 2010-11
 
The share of non-priority NPAs in public banks rose from less than half in 2011 (45.9%) to greater than 3/4th (76.7%) of total NPAs in 2016. Meanwhile, the share of priority sector NPAs shrank by more than 55% (thanks to the growth of non-priority sector NPAs) from 53.8% in 2011 to 23.3% in 2016.
 

Source: Reserve Bank of India
 
Infrastructure lending is also implicated as a major culprit in this Economic & Political Weekly (EPW) report from March 2017, which says banks tried to push these loans in an attempt to stymie the effects of the 2008 global economic crisis.
 
As the regulator, the RBI relaxed income-recognition norms and allowed banks to restructure firms’ loans instead of allowing these to turn into NPAs. “This made it easier for already over-leveraged [or financially over-burdened] companies to borrow more,” the EPW report said. Between 2010 and 2012, the borrowing capacity of these companies further grew while their underlying financial situation worsened. By 2011, the Indian economy officially entered into a recession as demand started to slow down.
 
“From the dramatic growth years of the 2003-08 period, real GDP growth rate during 2011-13 slowed down to 6%. New projects failed to take off due to the lack of government approvals and projects that had received credit during the credit boom period got stalled owing to the general slowing down of the economy. The problem was especially acute in the infrastructure sector. This led to a fresh wave of NPAs, especially in sectors such as infrastructure, steel, metals, textiles, etc,” the EPW report said.

 
In 2016, fraud NPAs accounted for 7.15% of all NPAs
 
Commercial banks had enhanced lending for long-gestation projects even as they had little expertise or experience in assessing such projects’ creditworthiness.
 
As a result, data showed that 7.15% of total gross NPAs as on March 2016 constituted fraud, as Finance Minister Arun Jaitley admitted in a reply to the Lok Sabha in 2016.
 
“This is even an greater worry [than the growth of NPAs or write-offs] because it directly reflects that risk assessment is not strong and it’s not the external environment but lacunae in the systems that has led to this,” Sabnavis of the credit rating agency said.

 
Since 2013, recovery of bad loans has dropped 53%
 
While NPAs and write-offs have leaped ahead unchecked, bad loan recovery has failed to keep pace. Since 2013, NPA recoveries have halved from 22% in 2013 to 10.3% in 2016, RBI data show. Recovery dropped from 18.4% in 2014 to 12.4% in 2016.
 
The government has advised banks to act against guarantors of defaulting borrowers under relevant sections of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, and other laws such as the Indian Contract Act, 1872,and Recovery of Debts due to Banks and Financial Institutions Act, 1993, etc., Jaitley said in his 2016 Lok Sabha response.
 
Of the 4.6 million cases referred to various recovery channels, RBI data show, 95.7% were referred to the alternative dispute resolution forums of Lok Adalats; 3.7% for prosecution under the SARFAESI Act, 2002, which allows banks and other financial institutions to auction properties to recover loans; and 0.5% to Debt Recovery Tribunals (DRTs), which work expressly to recover banks’ and other financial institutions’ debts.
 
While the number of cases referred to these channels has risen over four-fold since 2013, actual recovery has dropped by nearly half (44%) since 2015, data show.

Bad loan recovery under the SARFAESI Act–which accounted for the most money recovered–witnessed the biggest decline, of 40% between 2015 and 2016. Though loan recovery through Lok Adalats and DRTs picked up in 2016, the loans recovered in 2016 are still lower in value than the recovery in 2013.
 
In 2015-16, banks recovered Rs 22,800 crore of NPAs, lower than the amount recovered in 2013-14 (Rs 23,300), RBI data show.
 
Corporate NPAs v. farm loans waivers
 
Besides recovering NPAs through these channels, Jaitley also said the government and the RBI have undertaken measures such as setting up a joint lenders’ forum, a strategic debt restructuring scheme and a scheme for strategic structuring of stressed assets to resolve bad loans.
 
However, these measures appear to undo the work of the RBI’s asset quality review undertaken in 2015. Debt restructuring merely helps banks brush NPAs under the carpet, experts told IndiaSpend.
 
“Treating them [non-priority NPAs] as restructured assets where you increase the repayment periods and lower the interest rates delayed the inevitable. They should’ve been recognized earlier itself,” said Sabnavis. “‘This evergreening’ of stressed assets–giving a new loan to pay off the earlier loan–is common practice. The RBI is trying to prevent this from happening,” Sen from the India programme of the International Growth Centre told IndiaSpend.
 
Although the government appears eager to give non-priority sector corporate borrowers some leeway in repayment, it is quite likely to give into loan waiver demands, as IndiaSpend reported on June 15, 2017.
 
While corporates have assets to use as collateral for more borrowings, farmers–85% of whom are small and marginal–are too poor to qualify for more loans. Further, experts reason, the central government bears the responsibility for NPA resolution and state governments for loan waivers.
 
“Farm loans do have special features such as a six-month servicing period compared to three months for other sectors and in the case of natural disasters the loans are rolled over for a period of upto three years,” Sen told IndiaSpend.
 
But these are not blanket provisions, he explains in this report published in Mint on June 23, 2017. The measures are only applicable to farmers of officially designated ‘affected districts.’ The provision was already invoked in 2014 and 2015 in Maharashtra when the region witnessed drought, alleviating distress somewhat.
 
“The year 2016-17 is different. There was no drought or any other natural calamity. The farmers’ problems are almost entirely the outcome of demonetization… practically all farmers have suffered, and there has been no rolling over of their loans. As a consequence, farmers across the country have to either agitate or face the prospect of default,” Sen wrote. “While waivers absolve the farmer of all liability, defaults entail serious consequences such as loss of collateral, if any, and loss of access to future bank loans.”
 
Last week, after reporting a spike in its own NPAs “due to farm loan waivers,” HDFC Bank warned that lenders may discontinue fresh loans to the agriculture sector, The Economic Times reported on July 28, 2017.
 
“Banks are likely to see increase in NPAs in the agriculture sector and a general worsening of credit culture… Loan waivers are likely to also impact the supply of credit as fresh lending to the agriculture sector could dry up,” the bank’s economists said in a note.
 
To be sure, waivers come with the imminent possibility of ‘errors of inclusion’–even those farmers who do not need a waiver get it–making it an expensive prospect for the state exchequer, as the HDFC economists pointed out in their note.
 
However, defaulting on farm loans exposes the sector that employs 56% of India’s workforce to a heavy penalty. It may force the most distressed and the most vulnerable out of access to formal credit and possibly out of farming as well, Sen told IndiaSpend.
 
So should lenders waive farm loans? Or should they “restructure” non-priority sector NPAs? “The main consideration here is [that] a lot of the non-priority NPAs are large and valued customers of the banks, who also have considerable political clout,” Sen told IndiaSpend.
 

  (Saldanha is an assistant editor with IndiaSpend.)

Courtesy: India Spend
 

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