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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