Download - Waiver IFMR
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Farm loan waivers are they
effective instruments
Seminar at IFMR, Chennai on
6 May 2008N.Srinivasan
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Dont be hasty;You can take aLoan; it is just
like loot. NoNeed to repay;Well waive itHand
s up
Free Bank of India
..Branch
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The budget proposal
Waive all overdue farm loans as on 31December 2007 of farmers holding upto 5acres
Offer a settlement with a 25% rebate onoverdue loans of other farmers
Total bill of Rs 60000 crores
40 million farmers to be benefited(average relief of Rs 15000 per farmer)
Banks to give fresh loans post-waiver
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Problems of farmers
Stagnant productivity and production
Terms of trade not favourable
Weather risks, natural calamities Market risks of unremunerative prices
Limited technology solutions
Lack of access to inputs - financeLoan defaults are a result not a cause
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Is waiver a solution
A temporary relief to defaulters but a
long-drawn problem for the banks
Severe and persistent moral hazardpotential
Credit availability risk for all farmers in
future
Waiver treats symptoms not the cause
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Test of solutions
Fit
Equity
Food security impact Income impact
Future focus
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Credit intensity of agri production
312006-07
30.32005-06
23.42004-05
11.72000-01
6.81990-91
7.31980-81
Credit flow as %agri GDP
Year
It takes 3 times more credit to generate unit GDP in agriculture compared to 80-81!
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Credit as an instrument
Share of agriculture in credit has been constant
share of agri in GDP declining
Improved credit flow has not had any direct
impact on production Interest costs form less than 2% of value of
output (Sriram 2007)
At best credit provides liquidity and smoothensconsumption and production needs
Credit as a vehicle of relief is not fit choice
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Equity issues
Covers only borrowers from banks Borrowers are less than 49% 39% of indebted farm households do not borrrow from
banks
Of farmers with less than 2 ha land, 49% borrow frominformal sources 64% of borrowers had debts to informal sector Better off farmers access bank credit Disadvantaged areas and vulnerable populations not
targeted sharplyMany undeserving farmers would benefit not all deserving
would get it. Default is a poor criterion of selection offarmers for state funded relief
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States with higher debt incidence
523050.8West Bengal
2396374.5Tamil Nadu
1837252.4Rajasthan
4157665.4Punjab
1697354.8Maharashtra
1421850.8MP
3309764.4Kerala
1813561.4Karnataka
2600753Haryana
1552652Gujarat
2396582AP
1258548.4All India
Average debt per
farmer household (Rs)
% of indebted
farm householdsState
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Food security
Food security interests not promoted
No targeting of production or productivity
Priority crops/areas not targeted Factors influencing crop planning or
cultural practices not impacted
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Farmer security
Reduction of debt of farmers improves
financial condition
But renders continued bank credit flow
risky
Future investments in productivity
enhancement would be difficult, as long
term loans may not be easily available
No direct impact on future incomes
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Are we paying enough to farmers
951580507.18458.16Mean (91-02)
9377915436202001-2002
9087615176102000-200110687314825801999-2000
12596575245501998-99
10976195885101997-98
11985677444751996-97
10415375773801995-96
8475084743601994-95
7454634433501993-94
6954033943301992-93
6673432932751991-92
World Market
Price (WMP)
Minimum Support
Price (MSP)
World Market
Price (WMP)
Minimum Support
Price (MSP)
RiceWheatYear
Source Ramesh Chand 2003
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Will banks give loans in future?
Post-waiver appetite for farm loans bound todecline among banks (ARDRS experience)
Priority sector norms would compel to some
extent Avoidance of riskier (vulnerable) clients
Shorter term (crop) loans would be preferred
Investment loans might suffer Growth rates seen in last three years may
not happen
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Source: Expert group on agricultural indebtedness
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Alternatives - 1
Making farm insurance universal and
effective
Making crop insurance compulsory
State to pay the premium for all small farmers
Corpus to provide gap funding on claims
Investment in systems to take unit of
coverage to village
Open the scheme to private insurers to
expand outreach
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Crop insurance-some numbers
2004-05 2005-06 2006-07
Farmers covered (Lakh) 162 167 180
Acreage (lakh ha) 296 278 273
Sum assured (Rs crore) 16844 18588 21351
Premium (Rs crore) 535 554 600
Claims paid (Rs crore) 1199 1398 2245
To cover all farmers in the country the outreach should
expand by about five times
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Alternatives - 2
Introduce income insurance scheme for all smallfarmers as a safety net
Invest in institutions for creation of markets andfarmers participation in markets
Accelerate financial inclusion initiative Enable effective redemption of money lender
debts Carry out public investments that improve
productivity and incomes Improve RKVY XI plan outlay of Rs 25000
crores compares poorly with outlay on waiver
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Thanks for the patience
Time for questions