Briefly discusses the destructive and divisive impact of politics of farm loan waivers in India and its impact on small and marginal farmers that need the waivers the most.

1. Politics & Economics of Farm Loan Waivers in India
Shantanu Basu
The country has recently re-embarked on a fresh bank loan waivers proving, yet again, their
eternal political flavor. However, the question is who finally benefits from such crippling
waivers?
The Agriculture Censusi data hosted online by the Ministry of Agriculture from 1995-96 to
2011-12 shows that fragmentation of land is rising. In 1995-96, the average differential between
an individual small and marginal/small-medium owner owning <3 ha. and one owning >3 ha.
was an astounding 5.17 ha. or about 646% and 6.14 ha. or 740% respectively. Overall, about
1.30 crore individual/joint owners >3 ha., i.e. 11%, owned 49% of all lands, excluding those
owned by institutions. Fragmentation worsened by 2010-11 with the total number of operational
holdings increasing by 7.06 % over 2005-06. The average size of operational holding
concomitantly declined to 1.15 ha in 2010-11 as compared to 1.23 ha. in 2005-06. Small and
marginal holdings <2 ha. rose to 85.01% in 2010-11 against 83.29. Owners that held >2 ha.
increased to 15% who owned 56% of all land holdings a 7% rise in just five years. How many of
the disadvantaged owners in the <2 ha. category (85% of all owners) therefore received bank
finance? In contrast, how much did the larger farmers benefit from institutional finance?
Critical to good land management is the issue of sustainable credit, particularly in a monsoon-
dependent country like India. It is here that the issue of productivity comes in. Banks need
collateral that, for farm produce, is the crop. Given the overwhelming preponderance of small
and marginal holdings, bank finance is not always forthcoming since the average land holding
often does not hold enough value to serve as collateral for a loan. Therefore, unscrupulous
money lenders and microfinance institutions are their mainstay. According to National Crime
Records Bureau’s latest farmer-suicides data, of the over 3,000 farmers who committed suicides
across the country in 2015 due to debt and bankruptcy, 2474 had taken loans from banks or
microfinance institutionsii. Moin Qazi says, “The nation (India) has just 13 bank branches per
100,000 people and only about one in four people have access to the internet. Single households
run about 96% of the nation’s unincorporated non-farm enterprises and only 1% received loans
from the government. For the bulk of low-income households, moneylenders are the only
dependable source for money when emergencies arise”iii. The rate of interest charged by
moneylenders is often mind-boggling. Qazi says, “It is possible to get day loans in the vegetable
market that provide 100 rupees in the morning but have to be repaid with 10 rupees interest by
dusk”. Such unbelievable rates have attracted all those with some disposable cash — from
shopkeepers, government officials, and policemen to village teachers — now lend in the hope of
making a killing. They are willing to extend credit, but at highly extortionate rates – sometimes
exceeding 50%, which keeps borrowers in lifelong penury, as also their assigns and successors.
From what sources did such dubious lenders obtain their loanable funds?
In 2012, nearly 48% of farmers who needed loans got it from informal sources such as
moneylenders and landlords, according to the All India Debt Investment Surveyiv, against 36% in
1991 and 43% in 2001. Among farmers who owned land parcels smaller than 0.1 hectares, 85%
had pending loans from such informal finance sources. Among farmers who owned farms larger
than 10 hectares, only 21% had outstanding loans from informal lenders. In 2010, the task force

2. on Credit Related Issues of Farmers said 36% of debt had interest rates ranging between 20%
and 25%. Another 38% of finance was borrowed at interest rates over 30%. So how did loan
waivers help them?
A report by Naheed Ataulla & Anand J in Jul, 2015v, quoted the example of a farmer in Mandya
district of Karnataka who took a loan of Rs. 4 lakh for farming, for his daughter's marriage and to
repair his small thatched leaking house. This loan was taken at 5% interest per month, which
translates to a colossal 80% annual interest on a compounded basis. The farmer was physically
unfit to undertake cultivation while his wife and daughter were daily wage farm labourers.
Obviously, no financial institution would bet their loans on such borrower, barring the
moneylender. Ironically, a bank loan that carries 4% interest (with govt. subsidy) jumps to 14%
if defaulted. Against these, cooperative banks charge 12% while microfinance institutions earn
24%. The moneylender charges 24-30%, but compounded at arbitrary intervals, much like
unscrupulous microfinance institutions and without much transparent calculation. Ironically,
those that need bank finance the most were also less likely to obtain it.
And what of the collateral that banks obtain for ‘farm’ loans? Ataulla and Anandji discovered that in
2014-15, the total crop loan disbursed in Mandya district was Rs 1200 crore-Rs 600 crore from
commercial banks, Rs 350 crore from cooperative banks and Rs 250 crore from the cooperative
sector. It is alleged that of the Rs. 600 crore from commercial banks, as much as Rs 500 crore
has been given against jewelry mortgage, despite the ‘no collateral’ stipulation. Banks thus pass
off gold loans as agri-loans. To fulfill their agri-loan quota, banks also push credit to people
claiming to be farmers, but in effect are moneylenders. If a farmer defaults even once, the
institutional credit to them stops and they are forced to approach microfinance institutions
(MFIs) and moneylenders. The MFIs on paper charge 16-24% interest per annum, but effective
rate goes up to 65%. So how much are really farm loans that merit waiver?
A senior bank manager informs me that small and marginal farmers prefer "easy" loans from
money lenders who take just a blank stamped Promissory Note and a Power of Attorney for sale
of the property, unlike banks. These money lenders wait till dues near the market value of the
property and proceed to sell the property afterwards. Alternatively, when money lender dues
mount, farmers approach institutions for refinance. RBI stipulates that all farm loans up to Rs. 1
lakh should be collateral free and above that the banks/FIs take mortgage of their piece of
agricultural land. However, agricultural land cannot be sold directly via the SARFAESI Act.
Therefore banks/institutions have to approach a court decree for execution of sale that may take
several years. Where no bank refinance is available, the land is irretrievably lost to the money
lender, leaving suicide as the last option. In many cases, where banks hold mortgage on a
farmer’s land, money lenders clear the loan for clearing the mortgage and then sell the property.
Then they avail agricultural finance from institutions, as land owners. No bank or local police
dare touch these money lenders. Just how much does the small and marginal farmer benefit from
loan waivers?
As if this were not enough, multiple loans via self-help groups compounds rural indebtedness. In
Mandya district alone, there were 20,000 SHGs run by grameen banks that route loans via
informal diary entries, blank cheques, promissory notes, stamp papers, sale deeds, RC books, etc.
that obfuscates the identity of the loan giver and makes investigation well-nigh impossible. The
small and marginal famer’s woes do not end here. A sericulture farmer had taken a loan of Rs
4.50 lakh in 2010 from a primary cooperative bank. A year later, he managed to clear Rs 1 lakh

3. and another Rs 60000 in three instalments by 2012. The rest remains unpaid. In the meantime,
the price of mulberry, which was Rs 350 per kg, dropped to Rs 137 per kg in June at the local
cocoon market. The government had promised to pay a support price of Rs 30 per kg, if the rates
dropped, but Rs 24,000 is yet to reach the farmer. He owns two cows yielding 10 liters/day. The
state government had declared a support price of Rs. 4 per liter, but even this did not arrive. Then
there was a milk glut in the district that drove prices further southward. Should taxpayers be
made to pay for the sheer inefficiency and volatility of markets and government procedures?
High-cost seeds and pesticides and the attraction of bumper harvests have multiplied debts. In
Maharashtra, small and marginal farmers’ dependence on private money lenders has shown a
steep rise by 40% in 2016-17. Private money lenders disbursed Rs. 1254.97 crore, a rise of Rs
358.63 crore over 2015-16vi. Another arrester barrier is delayed release of crop insurance
compensation claims by cooperative banks that routinely divert such funds received from the
state govts. to underwriting their bad loansvii. Evidently, the distinction between a farm and non-
farm loan vanishes when starvation stares a small or marginal farmer in the face. In this situation,
step in moneylenders, banks and microfinance institutions, as judge, jury and executioner. How
does the small and marginal farmer gain much from mass-scale populist waivers? If not, who
does?
Therefore it is highly probable that bank finance too is monopolized by the 15% owners that hold
56% of cultivable land and control bank boards, nearly all of whom also happen to be members
of legislatures of states and the Centre and lesser political mortals. Interestingly, an ICRIER
studyviii, non-institutional sources of agricultural credit accounted for 36% of all credit in 2013 of
which moneylenders alone accounted for 29.60%. At the same time, loan waivers caused NPAs
of PSBs to rise about six-fold from 2005-06 to 2012-13, rising to 4.77% of all NPAs. Part of
such rise may have been the effect of waivers that encouraged non-compliance. What are even
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% could easily deposit it in a financial institution and obtain an interest rate of then
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%. How many small and marginal farmers that lead a hand-to-mouth existence
could afford to indulge in such arbitrage that would need reserve survival cash surpluses? If
mostly larger land owners defaulted, how does a waiver help the small and marginal ones?
Production loans sanctioned to farmers for productive purpose 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% 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, long-term credit from 1.67 to 7.15 and total
credit from 5.33 to 30.28 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 loaning banks neither checked nor reported.

4. 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, boards of nine out of 30
state co-operative banks had been superseded, the state governments interfered directly in co-
operative banks by deputing officials to top positions and by setting up common cadres for
senior positions in co-operatives across tiers, and 53626 out of about one lakh primary
agricultural credit co-operative societies (PACS), were incurring losses. Although the share of
co-operatives has been declining consistently, as on March 31, 2013, the short-term co-operative
credit segment comprised an expansive 92,432 primary agricultural credit co-operative societies
(PACS), 370 district central co-operative 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 as
compared to 55 per cent for commercial banks. If their exposure to the small and marginal sector
was this high, this should have translated into income and savings for borrowers when monsoons
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 benaami 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?
The above analysis raises several more disturbing questions. First, how many small and marginal
farmers benefit from institutional finance? Second, of these loans, how many can be safely
attributed to farming inputs? Third, what checks are available and exercised by banking
institutions to check the identity of applicants and to see that the funds disbursed by them are
utilized for farming purposes only? Fourth, what action was taken by institutions in recalling
loans when misuse was detected? Fifth, what was the rise in savings (deposits) instruments of
borrowers in banking institutions just after loans were sanctioned and released to them? Sixth,
what collaterals were obtained by loaning banks from farmers, if any, and have these been
enforced by the institutions? Seventh, it is worthwhile to check whether these banks, particularly
PSBs, sanctioned 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?
Eighth, what punitive actions have states taken to curb corruption in RRBs, DCCBs and PACS?
Why are reports on mismanagement not available in the public domain? Ninth, who are the
Directors/Governors/top executives of these institutions and what are their antecedents? Tenth,
how many of such officers and directors operate across such institutions and who appointed them
to such positions and for how long? Eleventh, was any independent scrutiny conducted on
beneficiaries of loans by loaning institutions? If so, what final punitive action was taken by states
on such scrutiny reports? Twelfth, why have State Cooperative Agriculture and Rural
Development Bank (SCARDB) NPAs risen to 35.9% and to 37.09% in Primary Co-operative
Agriculture and Rural Development Banks (PCARDB), of all outstanding loans since credit
exceeded the GDP contribution of agriculture? Thirteenth, was any review of the productivity of
borrowing farms ever carried out, what were their results and supporting palliative/expansive
actions taken by governments and at what cost? Fourteenth, when credit expanded way beyond

5. 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? Last, but not the least, is Indian
agriculture economical any longer, least for the fault of the farmer?
Farm loan waivers have little or no regard whatever for the state of the nation’s finances and
exacerbate the already repressive taxation system that the taxpayer must interminably suffer.
Waivers encourage non-compliance while hordes of farmers are unashamedly ratcheted and
paraded publicly, often in violent demonstration, to obfuscate the identity of those that actually
gain from such waivers and canvass for electoral gain. Why not waive home and motor vehicle
loans for those that 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 too? Waiver sets a dangerous all-consuming
and nation-crippling precedent and the contagion is bound to spread in election season.
The author is a senior public policy analyst and commentator
i Ministry of Agriculture: Agricultural Census extracted on Jul 7-9, 2017 from
http://agcensus.dacnet.nic.in/nationalholdingtype.aspx
ii Tiwary, Deeptiman: In 80% farmer-suicides due to debt, loans from banks, not moneylenders, Indian
Express, Jan 7, 2017 extracted on Jul 10, 2017 from http://indianexpress.com/article/india/in-80-farmer-
suicides-due-to-debt-loans-from-banks-not-moneylenders-4462930/
iii Qazi, Moin: Inside the World of Indian Moneylenders, The Diplomat extracted on Jul 10, 2017 from
http://thediplomat.com/2017/03/inside-the-world-of-indian-moneylenders/
iv Hindustan Times: Farmers prefer moneylenders over banks: survey, extracted on Jul 10, 2017 from
http://www.hindustantimes.com/india/farmers-prefer-moneylenders-over-banks-survey/story-
KKe9IKNtHyfZxc6JiqwrzL.html
v Naheed Ataulla & Anand J: How loan sharks pull poor farmers into a debt trap, Times of India, Jul 27,
2015,extracted on Jul 10, 2017 from http://timesofindia.indiatimes.com/india/How-loan-sharks-pull-
poor-farmers-into-a-debt-trap/articleshow/48230786.cms
vi Qazi, Moin: Debts to money-lenders remain a fatal attraction, The Hans India, Jun 26, 2017, extracted on
Jul 10, 2017 from http://www.thehansindia.com/posts/index/News-Analysis/2017-06-26/Debts-to-
money-lenders-remain-a-fatal-attraction-/308708
vii Parth, MN: Marathwada Diary: Delayed crop insurance payments push farmers towards private
moneylenders, Firstpost, May 12, 2017, extracted on Jul 10, 2017 from
http://www.firstpost.com/india/marathwada-diary-delayed-crop-insurance-payments-push-farmers-
towards-private-moneylenders-3428282.html
viiiHoda, Anwarul & Terway, Prerna: Credit Policy for Agriculture in India – An Evaluation, ICRIER,
extracted on Jul 14, 2017 from http://icrier.org/pdf/Working_Paper_302.pdf