RBI stated in a report that farm loan waivers are encouraging defaults, adding to the stress of agricultural credit. In past six years, the farm loan waivers announced by 10 states totals to INR 2.4 lakh crore. It is noteworthy that this amount is four times the budget 2019-20 for rural jobs program.
Profitability of obtaining credit higher for non-beneficiaries as compared to beneficiaries
In an analysis for loan waivers in Tamil Nadu, RBI observed that the profitability of obtaining credit was higher for non-beneficiary farmers than the beneficiaries.
The state government’s loan waiver scheme was applicable only to agricultural loans availed by small and marginal farmers. Loan waiver benefit was not applicable for farmers with land holdings of above 5 acres.
The report observed that, “Empirical findings using Regression Discontinuity Design (RDD) suggest that in the immediate post-waiver period near the cut-off acreage of 5 acres, the probability of obtaining credit was higher for non-beneficiary farmers than for beneficiary farmers. However, the differentiation in post-waiver access to credit to the beneficiary farmer and the non-beneficiary farmer comes down as the supply of funds for agricultural loans normalises.”
Agriculture Credit Stressed
The Agriculture credit outstanding and agricultural credit disbursements have declined in recent years. Beneficiary farmers are unable to get new loans from banks until implementation of waiver programme. Loan waivers on household aren’t realised because they effect the credit flow to agriculture sector.
In the report RBI explained how loan wavier impacted the credit flow. In the past two financial years NPA has increased in agriculture sector at alarming rates. State Government strategy to win public vote increased loan waivers in India.
Policy Review Suggested
RBI suggested that agricultural policies need changes and loan waivers should be monitored. It said that government should set up institution similar to Goods and Service Tax which can suggest ways to improve credit to the agricultural sector. It recommended that consumption of loans up to INR 1 lakh made available to farmers. Further added digitisation of land records and subsidies. In addition, government should focus on sustainability of agriculture and avoid loan wavier as farmers lose interest in medium or long term because of it.