Farm Loan Waivers and Credit Culture in India
Introduction
Farm loan waivers are often used by governments to provide immediate relief to farmers facing debt distress. Recently, the Maharashtra government announced a ā¹35,000 crore farm loan waiver scheme, reviving debates about the impact of such waivers on fiscal discipline and credit culture. While waivers aim to reduce farmersā debt burden, institutions such as the Reserve Bank of India (RBI) have repeatedly cautioned that frequent waivers can weaken repayment discipline and create long-term financial risks.
Context
The Maharashtra government announced a ā¹35,000 crore farm loan waiver scheme. Out of this, around ā¹20,000 crore will be used to waive loans of defaulting farmers, while about ā¹15,000 crore will be provided as an incentive of ā¹50,000 to farmers who regularly repaid their loans. Although the state government claims its financial position is strong enough to bear the cost, experts warn that repeated waivers may weaken credit discipline and fiscal sustainability.
Objective of Farm Loan Waivers
The primary objective of farm loan waivers is to reduce the debt burden of farmers affected by crop failures, price volatility, and climatic risks. By clearing outstanding debt, the government expects farmers to restart agricultural investment and improve rural economic activity.
Historical Background
Farm loan waivers in India have been implemented by both the Union and state governments. Since 1990, the Union government has implemented two nationwide farm loan waiver schemes, while states have increasingly announced their own schemes, particularly after 2014ā15.
First Nationwide Loan Waiver Scheme
The Agriculture and Rural Debt Relief Scheme (ARDRS), 1990 was the first nationwide farm loan waiver programme. It covered short-term loans and overdue instalments of term loans owed to public sector banks and Regional Rural Banks as of October 2, 1989. The scheme provided relief up to ā¹10,000 per farmer without differentiating farmers based on landholding size.
Second Nationwide Loan Waiver Scheme
The Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS), 2008 expanded coverage to include scheduled commercial banks, Regional Rural Banks, cooperative credit institutions, and local area banks. The scheme provided greater benefits to small and marginal farmers with landholdings up to five acres.
Fiscal Cost of National Schemes
The 1990 loan waiver scheme cost about ā¹10,000 crore, which is approximately ā¹50,600 crore at 2016ā17 prices. The 2008 loan waiver cost about ā¹52,500 crore, equivalent to around ā¹81,200 crore at 2016ā17 prices, according to the RBI Internal Working Group.
Expansion of State-Level Loan Waivers
Since 2014ā15, around ten states have announced farm loan waivers worth approximately ā¹2.4 lakh crore, which is about 1.4 percent of Indiaās GDP at 2016ā17 prices.
Major state announcements include
Madhya Pradesh ā ā¹36,500 crore (4.5 percent of GSDP)
Rajasthan ā ā¹18,000 crore (1.9 percent of GSDP)
Chhattisgarh ā ā¹6,100 crore (1.7 percent of GSDP)
Similarly, Karnataka expanded its waiver scheme from ā¹18,000 crore in 2017ā18 to ā¹44,000 crore in 2018ā19, which is about 3.4 percent of GSDP.
Impact on State Finances
The fiscal burden of farm loan waivers is usually spread over three to five years through phased payments to banks. The fiscal impact varies across states and ranges from 0.1 percent to 1.8 percent of Gross State Domestic Product (GSDP).
Political Economy of Loan Waivers
Farm loan waivers are often associated with electoral politics. An RBI Internal Working Group report (2019) observed that several waivers, including the nationwide schemes of 1990 and 2008, and many state-level waivers after 2014, were announced close to elections.
Impact on Agricultural Credit
Loan waivers are associated with a temporary slowdown in agricultural credit growth and loan disbursement. However, according to the RBI, credit growth generally recovers in the following years as banks gradually resume lending.
Concerns about Credit Discipline
The Reserve Bank of India has repeatedly warned that loan waivers weaken repayment discipline. Farmers may delay loan repayment in anticipation of future waivers, which can damage their credit history and reduce access to fresh institutional loans.
Rise in Agricultural Non Performing Assets
Weak repayment behaviour has contributed to rising non-performing assets in agricultural lending. Agricultural NPAs stood at 8.44 percent as of March 31, 2019, indicating growing repayment stress in the sector.
Issue of Moral Hazard
Loan waivers create moral hazard in the credit system, as borrowers may deliberately default on loans expecting future government waivers. This undermines the functioning of the formal agricultural credit system.
Criticism by Economists and Policymakers
Former RBI Governor Raghuram Rajan argued that loan waivers benefit only farmers with access to formal banking credit, leaving out many vulnerable farmers dependent on informal moneylenders.
Former RBI Governor Urjit Patel also warned that repeated waivers weaken credit discipline and repayment culture.
Opportunity Cost of Public Expenditure
Large expenditure on farm loan waivers reduces funds available for long-term agricultural investment, such as irrigation infrastructure, storage facilities, agricultural research, and rural market development.
Limited Effectiveness of Loan Waivers
According to a State Bank of India research report, out of 3.7 crore eligible farmers since 2014, only about 50 percent received waiver benefits by March 2022. The report concluded that loan waivers have had limited success in addressing long-term farmer distress.
Alternative Policy Measures
Experts suggest that direct income support programmes may provide a more sustainable solution. With similar expenditure of about ā¹50,000 crore, income support schemes could benefit a larger number of farmers and provide more stable financial assistance.
Conclusion
Farm loan waivers provide short-term relief to indebted farmers, but they are not a sustainable solution to agrarian distress. Repeated waivers weaken credit discipline, strain public finances, and reduce long-term agricultural investment. A more effective strategy would focus on increasing farmersā income through structural reforms, improving agricultural infrastructure, expanding crop insurance, and strengthening income support mechanisms.
Source : Indian Express