By Kushankur Dey
Farm loan waivers amounting to more than Rs 85,000 crore in the two consecutive financial years (2017-18 and 2018-19) announced by various state governments are the flavour of the season. This can undoubtedly affect credit offtake and induce further stress for banks and agrarian crisis. It is reported that the farm sector non-performing assets (NPAs) accounted for 16% of banks’ advances under the priority sector lending as of October 2018. Post the farm loan waivers announcement period, credit growth in agriculture and allied activities has been a meagre 2.9% from April-October 2018, and on a year-on-year basis, around 8%. In 2016-17, credit growth reported was 13%, followed by 5.5% in 2017-18.
What impact these farm loan waiver schemes would have on both rural credit offtake and farmers should attract the immediate attention of policymakers and academics. It is noteworthy to mention that credit is a critical resource to farming households for carrying out crop production, and meeting consumption and pecuniary expenses. More than 85% of small and marginal farmers in India claim less than 1-2 hectares of holdings, and under the priority sector lending route, at least 8% of direct (agriculture credit) lending should reach them.
However, credit access from institutional sources has been limited as moral hazard and adverse selection in credit financing to smallholder farmers are extremely high. Even if they access short-term crop loan capped with an insurance premium, they often fail to repay the loan amount after realising sale proceeds from the harvest. So, from a rational expectation point of view, production quantum, level of inventory, previous debt outstanding, and market clearing price decide farmers’ ability to repay the loan. Otherwise, they tend to default on repayment.
Before exploring any causal relationship between the farm loan waiver scheme and credit offtake, we can look at the credit-deposit flow in rural areas and performance of rural banks for considerable period. For example, regional rural banks (RRBs) among the scheduled commercial banks (including urban cooperative banks and local area banks) accounted for 25.1% of total institutional credit offtake in 2016-17, and until now remain a major source of institutional credit flows.
It is observed that credit offtake in specific regions (as rural banks follow a service area approach) has increased with a decreasing rate. Credit-deposit ratio across states has been showing a declining trend and reported credit growth of 15.19% CAGR and deposit growth of 14.3% CAGR from 2011 to 2017. This implies that rural banks are not in a position to mobilise the required amounts of deposit to make proportionate lending and that has affected their metrics of operating efficiency relating to risk-weighted capital adequacy ratio, net interest income, return on assets, and economic value of equity.
Findings also suggest that the declining trend of credit-deposit ratio, owing to farm loan waivers being a case in point, can induce stress in rural banking and, as a consequence, banks will be reluctant to lend further to the farm sector. Farm loan waiver schemes can produce a trickle-down effect on credit offtake, deposit mobilisation, and banks’ operations and performance.
Although direct institutional credit in agriculture has increased 89.8% in 2016 from 76.1% in 2010, and the magnitude of indirect credit has reduced from 22.9% to 11.2% from 2010 to 2017, the rural credit outlook is likely to get changed post the loan waiver period. In this regard, it is worth noting that the share of long-term credit to the farm sector declined from 74.3% in 1991 to 37.8% in 2012, as rural cooperatives and RRBs couldn’t channelise investment credit into the rural farm sector effectively.
Although the share of informal credit in total outstanding debt has gone down with various policy initiatives by the Reserve Bank of India and legislations of state governments to regulate moneylenders between 1950 and 2017, a farm loan waiver scheme would further push smallholders to the brink and beyond, and compel them to depend on varying informal sources for credit. In that, they have to bear with exorbitant rates of interest ranging between 24-36% per annum and risk of default. Eventually, credit lending rates and the magnitude of NPAs will go up in the foreseeable future. This can downgrade the ratings of banks in particular and destabilise the functioning of credit market in general.
So, a farm loan waiver scheme can be seen as populist and pet measure of politicians that can further worsen the banking habits of farmers and will be difficult to rejuvenate the credit culture between the lenders and the farmers.
In other words, a flexibility in crop loan repayment depending on revenue recognition from farming and subvention on interest rates based on repayment frequency can catalyse the pace of rural credit offtake and its growth, and eventually mitigate the stress for banks.
The author teaches finance at the Indian Institute of Management Bodh Gaya kushankur@iimbg.ac.in
via Farm loan waivers: Double-edged sword for banks & farmers – The Financial Express
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