Rash of loan write-offs: YV Reddy proposes agri-risk fund as alternative with Kerala’s Debt Relief Commission as model

  • A loan is a contract and it is improper for govts to insinuate themselves in a covenant between a bank and farmer, Reddy said

  • The risk mitigation fund which Reddy has proposed will have to account for socio-economic and cultural differences

  • Agri risk funds will not deter ruling parties from ‘bribing’ voters with devices like the income transfer scheme

Former Reserve Bank governor YV Reddy has proposed an agricultural risk fund with contributions from the central and state governments and participating banks, administered by an independent, professional body as a better alternative to blanket farm loan waivers.

Reddy made the proposal while delivering the Vijay Shankar Vyas memorial lecturer in Jaipur on 16 February titled, ‘Bleeding Hearts and Thinking Minds.’ Vyas had headed an advisory committee on credit flow to agriculture and related activities which Reddy had appointed when he was Reserve Bank governor. The committee, in its report of June 2004, had proposed an agri-risk fund.

The current crop of farm loan write-offs does not discriminate between irrigated agriculture, which is relatively risk-free and that which is dependent on erratic monsoons. The waivers are linked to asset-ownership; farmers need to own land to be eligible. They exclude informal leaseholder-cultivators. The relief follows the ‘electoral cycle’ and not the ‘distress cycle,’ Reddy said.

A loan is a contract and it is improper for governments as third parties to insinuate themselves in a covenant between a bank and the farmer borrower, Reddy said. But farming is a risky activity; even farmers who want to repay may be forced to default for reasons beyond their control, like erratic weather, price slumps and trade restrictions.

Unlike corporate borrowers, who have limited liability, farmers are proprietor-producers. Their liability is unlimited and their personal assets can be attached if agricultural income is insufficient to repay a loan or the collateral falls short.

 Rash of loan write-offs: YV Reddy proposes agri-risk fund as alternative with Kerala’s Debt Relief Commission as model

Representational image. Reuters

Reddy said a nuanced approach is necessary. The relief to be provided to farmers in genuine default should be professionally assessed and both the banker and the borrower would have to make sacrifices.

The Kerala Debt Relief Commission “could be the proximate model,” Reddy said in a telephonic conversation.

The Kerala Commission was set up in 2007 after a number of farmers in the state had killed themselves when crashing prices of pepper and rubber had forced them into debt default. It is based on the pre-Independence era Sir Chhotu Ram Commission of Punjab.

According to a news report, Prabhat Patnaik, a Marxist economist had suggested that model to Kerala’s communist government. (Ram was a prominent politician of pre-Partition Punjab who co-founded a party that represented the interests of zamindars. But he championed measures to provide relief to farmers from usurious moneylenders).

The Kerala Commission has seven members. It is headed by a retired judge of the Kerala High Court.

Justice (retired) KR Udayabhanu who was the commission’s chairman for six years till last May, said its mandate was restricted to waiving off loans which farmers had taken from cooperative banks.

It couldn’t act on loans from nationalised banks as they were controlled by the Reserve Bank. To be eligible, the annual income of the applicant has to be less than Rs 2 lakh. The commission has quasi-judicial powers. It can stay the recovery of loans and eviction of borrowers. But it doesn’t have powers of enforcement.

The commission holds sittings in districts with a large number of agriculturists like Idukki, Wayanad and Kozhikode after inviting applications and giving notice to the banks. The applicants are farmers but their loans don’t have to be agricultural. Often, cooperative banks don’t give agricultural loans, as they are low interest-bearing.

Since they pay 12-14 percent for deposits, they prefer to give non-agricultural loans. The commission gives relief on such loans, provided they are not for business or ‘luxury’ purposes like buying a car. The relief can’t exceed Rs 1 lakh.  Applicants become ineligible if they own or lease more than five acres of land.

Udayabhanu said the commission limits the recovery of accumulated interest to the principal amount; if the principal is Rs 50,000 the interest payable can’t exceed that amount.

Has the commission helped reduce suicides among farmers? Udayabhanu says ‘there were no suicides at all.” Kerala is a high suicide-rate state. Between 2007 and 2015 there has not been much change in the total number of suicides in the state.

It has ranged between 7,700 and 9,000. The number of suicides among cultivators and agricultural labourers has fallen from 1,232 in 2007 to 807 in 2014. In 2015 and 2016, it fell sharply to 201 and 321 respectively. Most of the suicides are of agricultural labourers. The bureau attributes very few of these suicides to agrarian distress: 68 in 2007, 11 the following year and none in 2009 and 2010 (Latest statistics on this score are not available).

“Once the principle is established, the details can be worked out,” Reddy said when asked whether the Kerala model could be extended to other states. The criteria for debt relief can be different for various crops and agro-climatic zones, he added.

Reddy was concerned about the spate of income transfer schemes and farm loan waivers announced by the centre and the states. He said the first farm loan waiver was made by finance minister Madhu Dandavate in 1990. It was of Rs. 10,000 crore, or Rs 50,557 crore in 2017 prices. Dandavate had said that the waiver would not be repeated but Reddy noted that that promise has been repeatedly breached.

In 2008, finance minister P Chidambaram announced another loan waiver which cost Rs 52,000 crore then or Rs 81,264 cr in 2017 prices.

In 2014, Andhra Pradesh and Telangana wrote off farm loans worth Rs 24,000 crore and Rs 17,000 crore respectively. This was followed by Tamil Nadu in 2016. Other states joined in later. In his August 2017 speech on the issue, former RBI governor Urjit Patel estimated their cost at Rs 130,000 crore or 0.8 percent of GDP.

Ideally, banks should assess the reasons for individual farm loan defaults. But since the individual loan size is small and there are numerous borrowers, broad criteria for relief have to be applied. But it cannot be an across-the-board waiver as the reasons for default vary from farm to farm, block to block, district to district and state to state, Reddy said.

Given the implications of blanket farm loan waivers on the fiscal deficit and by extension on inflation, interest rates, the cost of investment, and the culture of repayment, Reddy also flagged off Vyas’s proposal that political parties should vow not to promise farm loan waivers in their election manifestoes. The Representation of People’s Act should be suitably amended. The Election Commission should make such promises a violation of the model code of conduct.

He may be placing hope over experience.

The risk mitigation fund which Reddy has proposed will have to account for socio-economic and cultural differences. Udayabhanu said farmers in Kerala are not dependent entirely on agricultural income. They are middle-income borrowers. There is a culture of repayment and ‘nobody wants to default.”

Borrowers are wary of the social stigma attached to eviction notices. The loan sizes are not large, unlike in some states. Nationalised banks are under Reserve Bank control and may need a different architecture to deal with defaults, he said.

Agri risk funds will not deter election-facing ruling parties from ‘bribing’ voters with devices like the income transfer scheme announced in this year’s budget. The scheme to transfer Rs 6,000 to the bank accounts of farmers owning up to five acres of land is estimated to cost Rs 75,000 crore annually. In Telangana, the government transfers Rs 4,000 per acre per season to farmers. Even big farmers are not excluded. But that did not prevent it from announcing a limited loan waiver ahead of the assembly elections last year.

(The author is a senior journalist. He tweets @smartindianagri)

Updated Date: Feb 22, 2019 07:06:48 IST