Today's Editorial

18 August 2017

Waive the loan~II


Source: By Shantanu Basu: The Statesman


It is highly probable that bank finance is monopolized by the 15 per cent owners with 56 per cent of cultivable land and who control bank boards. The majority are members of state Assemblies or Parliament or even lesser political mortals. Interestingly according to an ICRIER study non-institutional sources of agricultural credit accounted for 36 per cent of all credit in 2013, out of which moneylenders alone accounted for 29.60 per cent. In parallel, loan-waivers caused NPAs of public sector banks (PSBs) to increase six times from 2005-06 to 2012-13, rising to 4.77 per cent of all NPAs.

Part of this increase might have been the effect of waivers that encouraged noncompliance. Still more interesting are the “arbitrage opportunities”; many farm borrowers may have derived profits from particularly the medium and larger ones. A farmer who received loans at a concessional rate of 4 per cent could easily deposit the money in a financial institution and obtain an interest rate of approximately 7.5-8 per cent in a fixed deposit scheme for six months, i.e. arbitrage in risk-free profit of 3.5-4 per cent. How many small and marginal farmers, who lead a hand-to-mouth existence, could afford to indulge in such arbitrage that would need reserve survival cash surpluses?

If larger land owners defaulted, how does a waiver help the small and marginal ones? Production loans sanctioned to farmers for productive purposes may not have been used for agricultural production, or may have been used only partially. This is when short-term credit, with the exception of cotton and sugarcane, does not attract interest of more than 1-2 per cent, making these loans prime targets for illegal diversion. Between 1975-76 and 2011- 12, the volume of short-term credit from commercial banks, co-operative banks and RRBs rose from Rs.1096 crore to Rs.346737 crore, that of long-term credit from Rs.499 crore to 107162 crore, and that of the total from Rs.1595 to Rs.453899 crore at current prices.

The growth of credit has been far higher than the growth of agricultural GDP, and in terms of the percentage of agricultural GDP, short-term credit has risen steeply from 3.66 to 23.13 per cent, long-term credit from 1.67 to 7.15 per cent, and total credit from 5.33 to 30.28 per cent during the period. Then, why is it that a small and marginal farmer has no fallback savings today? Evidently, either they received little or no bank finance or diverted the proceeds to non-farm purposes that lending banks neither checked nor reported. The ICRIER report quoted the task force on the Revival of Co-operative Credit Institutions, (2004) which attributed the decline of loaning institutions to ‘impairment of governance’, ‘impairment of management’, and deteriorating financial performance.

Elections had not taken place in co-operative credit societies for 10 years or more in some states, the boards of nine out of 30 state cooperative banks had been superseded, the state governments interfered directly in cooperative banks by deputing officials to top positions and by setting up common cadres for senior positions in cooperatives across tiers, and 53626 out of about one lakh primary agricultural credit cooperative societies (PACS), were incurring losses.

Although the share of cooperatives has been declining consistently, as on March 31, 2013, the short-term cooperative credit segment comprised an expansive 92,432 primary agricultural credit co-operative societies (PACS), 370 district central cooperative banks (DCCBs) and 32 state cooperative banks. Even though their share in total agricultural credit flow has diminished, they still provide credit to approximately 3 crore farmers, compared to 2.55 crore farmers who receive credit from commercial banks and 82 lakh farmers who receive credit from regional rural banks (RRBs).

Their total exposure in the loan portfolio to small and marginal farmers was 66 per cent, compared to 55 per cent for commercial banks. If their exposure to the small and marginal sector was that high this should have translated into income and savings for borrowers when the monsoon failed. Has any independent census been carried out to verify the beneficiaries of such loans? Is it possible that indigent farmers were being used as benami fronts by larger ones to corner available bank finance? If their share in institutional farm finance has declined appreciably since 1975-76, why do they still have an expansive and probably sinister network?

There are more disturbing questions

How many small and marginal farmers benefit from institutional finance? Of these loans, how many can be safely attributed to farming inputs? What are the checks available and exercised by banking institutions to check the identity of applicants and to ensure that the funds disbursed by them are utilised only for farming? What action was taken by institutions in recalling loans when misuse was detected? What was the rise in savings (deposits) instruments of borrowers in banking institutions just after loans were sanctioned and released to them?

What were the collaterals/mortgages obtained by lending banks from farmers, if any, and have these been enforced by the institutions? It would be worthwhile to check whether these banks, particularly PSBs, sanctioned an increasing number of loans without proper security at the end of every quarter not only to meet rising pressure from governments but also to understate rising defaults, the same as the PSBs did with corporate borrowers? What punitive action has been taken to curb corruption in RRBs, DCCBs and PACS?

Why are reports on mismanagement not available in the public domain? Who are the Directors/Governors/top executives of these institutions and what are their antecedents? How many of such officers and directors operate across such institutions and who appointed them to such positions and for how long? Was any independent scrutiny conducted on the real beneficiaries of loans by lending institutions? If so, what was the punitive action taken by states on such scrutiny reports?

Why have State Cooperative Agriculture and Rural Development Bank (SCARDB) NPAs risen to 35.9 per cent and to 37.09 per cent in Primary Cooperative Agriculture and Rural Development Banks (PCARDB), of all outstanding loans since credit exceeded the GDP contribution of agriculture? Was any review of the productivity of borrowing farms ever carried out? What were their results and what action was taken by governments and at what cost? When credit expanded way beyond agricultural GDP growth rates, governments introduced interest subvention, waivers, minimum support prices, etc., over the past 20-30 years. Why is it that the small and marginal farmer still remains distressed to the point of committing suicide?

Is Indian agriculture any longer economical?

To all this can be added the bogus fertilizer subsidy claims, fictitious irrigation dams and irrigation water. Farm loan waivers have little or no regard whatever for the state of the nation’s finances; they exacerbate the already repressive taxation system that the people must interminably suffer. Waivers encourage non-compliance while farmers are often involved in violent demonstrations to obfuscate the identity of those who actually gain from such waivers and canvass for electoral benefits. Why not waive home and motor vehicle loans for those who have lost their jobs and are unable to pay their EMIs? Why not waive the Rs.50000 crore that holds up Air India’s farewell sale? Waiver sets a dangerous precedent and the contagion is bound to spread in the season of elections.

The rapidly worsening plight of three-fifth of India’s poor makes a mockery of our traditional notions of democracy and its three core themes ~ fraternity, liberty and equality. This is destroying the socio-economic fabric of rural India. The last thing that any State would want is to fight relentless battles with its own citizens and hostile nations across our borders.