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Farm loan waivers – are they effective instruments Seminar at IFMR, Chennai on 6 May 2008 N.Srinivasan.

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Presentation on theme: "Farm loan waivers – are they effective instruments Seminar at IFMR, Chennai on 6 May 2008 N.Srinivasan."— Presentation transcript:

1 Farm loan waivers – are they effective instruments Seminar at IFMR, Chennai on 6 May 2008 N.Srinivasan

2 Don’t be hasty; You can take a Loan; it is just like loot. No Need to repay; We’ll waive it Hands up Free Bank of India …..Branch

3 The budget proposal Waive all overdue farm loans as on 31 December 2007 of farmers holding upto 5 acres Offer a settlement with a 25% rebate on overdue loans of other farmers Total bill of Rs crores 40 million farmers to be benefited (average relief of Rs per farmer) Banks to give fresh loans post-waiver

4 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 - finance Loan defaults are a result – not a cause

5 Is waiver a solution A temporary relief to defaulters – but a long-drawn problem for the banks Severe and persistent moral hazard potential Credit availability risk for all farmers in future Waiver treats symptoms – not the cause

6 Test of solutions Fit Equity Food security impact Income impact Future focus

7 Credit intensity of agri production YearCredit flow as % agri GDP It takes 3 times more credit to generate unit GDP in agriculture compared to 80-81!

8 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 smoothens consumption and production needs Credit as a vehicle of relief is not “fit” choice

9 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 from informal sources 64% of borrowers had debts to informal sector Better off farmers access bank credit Disadvantaged areas and vulnerable populations not targeted sharply Many undeserving farmers would benefit – not all deserving would get it. Default is a poor criterion of selection of farmers for state funded relief

10 States with higher debt incidence State % of indebted farm households Average debt per farmer household (Rs) All India AP Gujarat Haryana Karnataka Kerala MP Maharashtra Punjab Rajasthan Tamil Nadu West Bengal

11 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

12 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

13 Are we paying enough to farmers YearWheat Rice Minimum Support Price (MSP) World Market Price (WMP) Minimum Support Price (MSP) World Market Price (WMP) Mean (91-02) Source Ramesh Chand 2003

14 Will banks give loans in future? Post-waiver appetite for farm loans bound to decline 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

15 Source: Expert group on agricultural indebtedness

16 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

17 Crop insurance-some numbers Farmers covered (Lakh) Acreage (lakh ha) Sum assured (Rs crore) Premium (Rs crore) Claims paid (Rs crore) To cover all farmers in the country the outreach should expand by about five times

18 Alternatives - 2 Introduce income insurance scheme for all small farmers as a safety net Invest in institutions for creation of markets and farmer’s 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 crores – compares poorly with outlay on waiver

19 Thanks for the patience Time for questions


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