dfa-7-nov

Daily Financial News Analysis – 7th Nov’20 – Free PDF Download

Farm Loan Waivers

  • The issue of farm loan waivers is debatable
  • FLW has a strong ‘announcement effect
  • Some former governors of RBI feel – such schemes create a moral hazard as it provides an incentive to farmers to not service their loans while penalising those who pay on time.
  • Supporters of FLW poor class requires protection from servicing of debt at a time when the monsoon fails, and the resulting drought drives them to penury and, at times, to suicides.
  • Interestingly, in the last six years, only 10 states have gone in for such schemes, with Jharkhand being the 11th in 2020-21.
  • These are Andhra Pradesh, Telangana, Tamil Nadu, Maharashtra, Karnataka, Madhya Pradesh, Chhattisgarh, Rajasthan—which are prone to monsoon failures—and Uttar Pradesh and Punjab.
  • Since 2014-15, a total of Rs 2.31 lakh crore of waivers have been announced by all these states.
  • Maharashtra having three rounds in fiscal 2018, 2020 and 2021.
  • In 2017-18, Rs 80,000 crore was announced by the three states of Maharashtra, Uttar Pradesh and Punjab.
  • 2018-19 by the four states of Madhya Pradesh, Rajasthan, Karnataka and Chhattisgarh (all after elections) for Rs 1.04 lakh crore.
  • Therefore, it can be concluded that farm loan waivers of this scale are more of a recent phenomenon.
  • It also reflects the changing weather conditions where droughts have tended to become more frequent and localised, thus affecting certain communities.
  • The announcements are made in a year that has the announcement effect, the actual spread of the same is over a period and can stretch for 3-5 years.
  1. There has to be fiscal space available
  2. The schemes need to be designed and implemented, and this involves identifying the beneficiaries
  • The final amount disbursed as a proportion of the announced amount tends to be much lower.
  • Uttar Pradesh had announced about Rs 36,000 crore, and in four years has covered around 70% of the target.
  • Maharashtra’s big bang announcement of Rs 34,020 crore resulted in just Rs 18,540 crore being disbursed for two years, with no expense in the last two years.
  • Besides the sincerity of the state concerned, there are also issues in identifying the farmers as there are cut-out thresholds that must be adhered to, which probably keeps out a large section of the borrowers.
  • It could be specific to crops in specific regions, which again filters out the beneficiaries.
  • There needs to be proof that the monsoon failed in certain villages and the panchayat must testify the same.
  • At times, it is made conditional where the farmer must repay some part of the debt to avail of this facility.
  • This leads to exclusion of several farmers from the scheme.
  • Madhya Pradesh made an announcement of Rs 36,500 crore in 2018-19 and, so far, there has been no outlay in any of the three budgets.
  • Andhra Pradesh, for instance, had announced Rs 24,000 crore in 2014-15, and in the last six years has just about spent 50% of this amount.
  • When such loan waivers are announced, the amounts spent must be evaluated.
  • Besides logistics issues, often fiscal constraints come in the way of the states providing for the same, which elongates the time period and often a good monsoon in the subsequent year puts the issue of waiver on the backseat.
  • While all waivers are finally paid by the government through budgetary allocations, non-performing assets (NPAs) in the banking system are more serious as they are losses for the institutions and come in the way of returns to their shareholders.
  • The distress in the business community has been increasing over the years, as has the need for governments to support farmers.
  • The difference is that when farmers are unable to pay and the government steps in, there is solace for banks as the asset is moved out of the book as it is fully serviced.
  • In case of non-farmer loans where there is no such waiver, the loss is directly on banks.
  • If waivers are bad and create a moral hazard, doesn’t the same principle apply to NPAs that are finally written off?

 

 

 

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