Domino-effect reaches K'taka: Clearing farm debt to put pressure on finance

With the impact of three drought years (2014 to 2016) still not wearing off and outstanding farm loans rising from Rs 100 billion in the last year to reach Rs 1.2 trillion in Karnataka, both ruling Congress and leading opposition BJP have jumped the gun to promise loan waivers to the states’ farmers in the heat of election campaign.

About 5.3 million farmers in the state owe banks Rs 600 billion worth of crop loans, while 3.2 million owe an equal amount worth of term loans, those meant for farm equipment and allied investments. About more than a million farmers are present in both the lists, officials said.

Though Karnataka has an edge in terms of fiscal health—its debt to GDP ratio is lowest among states while fiscal deficit to GDP ratio is among the lowest—the scheme would nevertheless put a heavy financial burden on the state exchequer.

“From the farmers’ angle, it is always good since a lot of factors from the monsoon to price fluctuations affect their incomes. But from the banker’s side, we always have exposure of small amounts to a large number of farmers, which becomes difficult to address once loan waivers are implemented,” a senior banker from a nationalised bank in Karnataka told Business Standard.

Comparably big states Uttar Pradesh and Maharashtra have implemented agricultural loan waiver schemes over the last 12-18 months, and it cost each of them more than Rs 300 billion. The fact that the new Karnataka government would need to spend similar amounts cannot be ruled out.

Owing to a better monsoon after three parched years, advances to the agriculture sector have grown in 2017-18 in Karnataka. Till December 2017, banks have lent Rs 650 billion to farmers, almost twice of the Rs 375 billion lent in the first year of Siddaramaiah government (2013-14).  

In terms of stock, outstanding farm loans have more than doubled from Rs 545 billion when Congress formed government in 2013, to Rs 1.2 trillion at end of 2017.

The ruling government has already waived off Rs 82 billion worth of farm loans—lent by cooperative banks—benefitting 2.2 million farmers in 2017. To cover loans from all bank categories including nationalised banks up to a specific date, Karnataka might need to spend amount comparable to that spent by Maharashtra and UP.

On the greener side, data show that Karnataka recovers farm loans with a better efficiency that the national average, which points to a better and improved credit culture. Compared to 92% of loans recovered by district central cooperative banks (DCCB) in Karnataka as of June 2017, the nationwide recovery ratio of DCCBs was 70%.

 

However, the rosy picture has some blots. In recent years, there has been an increase in loans getting carried forward after drought, which have not been included in the amount to be recovered in the first place, bankers said.

“Recovery is calculated as a percentage of amount to be recovered in that year, and not as a percentage of amount due. The former excludes those loans which are carried forward owing to natural calamities,” M Mohan Reddy, convener of state level bankers’ committee of Karnataka said.

Congress in its manifesto has promised creation of an ‘agriculture corridor’ in the state covering 10 districts to double farmers’ incomes and also create a statutory farmers’ income commission.

BJP has further promised to spend over Rs 1.5 trillion on irrigation projects along with direct cash support to dry land farmers based on the Telangana direct investment support model, mooted by the rival Congress as well.