Rural India and bank loan waivers

BS Suran  and KU Viswanathan

When bankers are asked to respond to a state government demand for loan waivers, they often nod in agreement. Of course, they know such decisions jeopardise a repayment culture which has taken many years to shape. But no banker wants to antagonise the political bosses.

Such decisions happen despite the fact that the banking sector has been witnessing unbridled growth in bad loans, largely led by funding imprudent corporates and the infrastructure sector.

Why then is fiscal prudence thrown to the winds? Why was the debt waiver of 2008 not used for supporting the productivity of farms? Why was it not channelised for building a supportive infrastructure for farmers? 

It’s public money, fool

Banking being a Central subject, there is a clear need for an RBI diktat against using public institutions — which are repositories of public money — for acts that can vitiate the repayment culture. Should public institutions like banks be used for mere political gains? To carry forward the principle of “minimum government and maximum governance”, what banks need is autonomy in its true sense.

However, many feel even the Central bank is only constitutionally independent, and the Government has the power to direct its actions. But this needs to change. Election manifestos of political parties, which carry such populist schemes, should be treated as a party liability and not a sovereign liability of the state with taxpayer’s money.

Well, with natural calamities occurring in unforeseen succession, it is important to sift the grain from the chaff, especially when farmers are in dire straits and need help. In the case of genuine crop failures, the banks need to ensure quick implementation of the process of rescheduling term instalments and converting crop loans to term loans.

This has been in vogue and must be done or allowed without bureaucratic delays. Needless to say, designing newer financial credit products such as “cyclical credit” for use in a fragile eco-system is more pronounced now.

Take Andhra Pradesh; its loan waiver touches two significant population groups — farmers and self help groups (read women). Often, Andhra Pradesh was touted as the Mecca of the microfinance movement in India; it had ushered in an inclusive banking process with an NPA-savvy financial product for the poor.

With almost 15 lakh SHGs with an average of 12 members, it touches base with 18 million households and boasts a virtual carpet coverage of poor households in urban and rural hinterlands of the state.

However, the SHGs’ gradual switch to a pampered client status with “no-interest loans, enticements, total financial inclusion (a ‘debt to repay debt’ scheme attempted by the State) have not augured well to maintain the basic tenets of SHG and the spirit of “Self-Help” — the very edifice of this community empowerment.

The poor often value self-respect and dignity despite all odds, but such doles infuse more complacency and dependency, and dampens self-respect.

Dependency syndrome

With almost half of bank credit outstanding to SHGs (₹40,000 crore) being accounted for by the State, it is likely to impact the very foundation of the programme, with repercussions in other states as well.

The State could better serve its SHGs and poor women by effectively leveraging their integrity, honesty, and organisational and relationship building capacities. Rather than attempt handouts and promote dependency, it would be better to assign minor government contracts to these groups — deals which would generally go to private contractors.

The other major client segment for the debt waiver scheme of the State is the agrarian community. Though the State had introduced the “RythuMitra Groups” a joint liability group of farmers for enabling inclusion, many continue to remain out of the banking fold.

Such programmes neither distinguishes between wilful and non-wilful defaulters, nor irrigated and non-irrigated agriculture. All these incentivises a deviant client behaviour.

States with a higher share of household debt to institutional channels are bound to benefit more from the relief package. For instance, Andhra Pradesh had a high share. 

For long-term solutions

Mass debt relief rests on the hypothesis that it would enable otherwise ineligible farmers to access fresh loans from the banking channels which would lead to an increase in farm investments and productivity.

However, evidence has indicated that only around 32 per cent of the farmer households who had received relief or waiver had applied for a new loan.

Many farmer households that received the relief had resorted to borrowing from informal channels. Thus it all ends up in a situation of poor client-banker relationship and exclusion.

However, with repeated crop failures a likelihood in arid mono-cropped, unirrigated tracts, there could be some case for a selective write-off and waiver of dues from the farmer.

However, the real longer-term solution lies in putting appropriate risk mitigation systems in place for crop production.

Crop insurance is often talked about as an option for loanee farmers. However, its functioning has been riddled with operational challenges, moral hazard and sustainability issues, with the Government often bearing the cost of insurance coverage. Thus, the real longer-term issue lies in putting climate proofing systems in place especially in “climatic hot spots”.

While, the Gujarat model has shown how water harvesting and conservation models using check dams, farm ponds can recharge groundwater and de-risk farming, but weather coding, climate proofing and crop advisories could serve as a very useful amalgam with water conservation measures for the agrarian community.

This is particularly true when the farmer constantly faces depressing terms of trade and confidence- sapping monsoons trends. Therefore, it is desirable that the State exchequer invests its limited resources for the longer-term benefit of the farmer, rather than look for short-term solutions.

(The writers are with NABARD)