Don’t miss the latest developments in business and finance.

Waiver after waiver

Maharashtra govt's loan waiver will do more damage to the credit structure

Image
Business Standard New Delhi
Last Updated : Jan 29 2013 | 3:33 AM IST

The Maharashtra government has come up with a Rs 6,200-crore loan waiver for big farmers, who were not covered under the central government’s Rs 71,000 crore loan waiver package announced in the 2008-09 Budget. The state package will also cover farmers who have repaid their loan instalments regularly, and has been announced when the state government’s finances are under strain following the acceptance of the 6th Pay Commission’s recommendations (which come with a bill of around Rs 10,000 crore). Ironically, the state government is yet to fully implement the Central relief package for the suicide-affected farm families of Vidarbha.

The state’s move is intended to remove the complaints voiced by big farmers and regular loan payers who felt discriminated against when they were left out of the Central package. But two wrongs do not make a right. Indeed, to the extent that the state package became a political necessity, it underlines the damage to credit discipline done by any blanket loan waiver. The state government’s move may be a political palliative, but it will do even more damage to the credit structure.

The costs are already evident. Faced with mounting farm loan defaults after the sweeping write-off, most credit institutions (commercial banks, cooperative banks and regional rural banks) have become wary of lending to farmers—reflected in the 32 per cent shortfall in the flow of institutional credit to agriculture in the first half of the current financial year (disbursements are Rs 95,064 crore, against the six-month target of Rs 1,40,000 crore). Though the break-up of this disbursement is not available, it is believed that crop loans to farmers have taken the biggest hit, with more money going to activities where the repayment prospects are better.

What this means is what had been forecast: populist moves like sweeping loan write-offs end up by forcing farmers to look for credit from non-institutional sources, which charge higher interest rates. That is why the Radhakrishna committee on rural indebtedness had in its report stopped short of recommending any waiver of agricultural loans — a fact alluded to by the then finance minister P Chidambaram while announcing the debt waiver. The committee’s report, which seems to have been put in the deep freeze, had drawn attention to the fact that over half of all farm households did not borrow from institutional sources and were paying usurious interest rates to moneylenders. Consequently, the panel had suggested that banks should give one-time term loans to such farmers to free them from moneylenders’ clutches—a quite different proposition from a loan waiver.

More From This Section

First Published: Jan 09 2009 | 12:00 AM IST

Next Story