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Loan waivers drive bank NPAs in MP up by Rs 2,949 cr in 10 months to Sept

Hundreds of thousands of farmers across Madhya Pradesh have been queuing at cooperative societies and fertiliser shops the past few weeks, to get their share of urea just when the peak wheat sowing season is on.

According to official sources, urea demand across the state has spiked as the extended southwest monsoon has left a small sowing window for wheat farmers, who do not stock urea otherwise.

Usually urea is needed twice for an ideal wheat crop — the first time within a fortnight of planting and the second after a month-and-a-half of sowing.

Loan waivers: more harm than good for farmers?

Now if a farmer in Madhya Pradesh has to apply urea to his crop tomorrow, in most cases he will go to the nearest cooperative society or government outlet today and pay for his requirement in cash. This is simply because he is no longer eligible for credit. The other option for him is to buy from a private dealer at a higher price in the black market.

Why have things come to such a pass for many of Madhya Pradesh's farmers? Some believe it is mismanagement at the local level and blame the much-talked about farm loan waiver scheme for the urea crisis.

They say that because of the loan waiver, several farmers haven’t renewed their short-term loan accounts. As a result, they have become ineligible for fresh seeds and fertilisers on credit.

Though unproved, if the allegations are found to be true, it could be another black spot on farm loan waivers, which have themselves come in for severe criticism from a section of policymakers and experts on the grounds that they do more harm than good to farmers in the long run.

Most have prescribed loan waivers for farmers as short-term band-aid, not a permanent solution to the problems facing India’s farm sector, be it lack of investment, low farm-gate price, poor storage and lack of market reforms in agriculture.

Impact on bank NPAs

Worse, loan waivers also impact the banking sector in states that have announced such schemes.

In Madhya Pradesh, the latest report of the State Level Bankers Committee said that the farm-debt waiver scheme, the ‘Jai KIsan Fasal Rin Maafi Yojana,’ has brought about a spike in the NPAs of the banks in the state.

NPA or non-performing assets of banks in Madhya Pradesh registered a sharp increase of Rs 2,949 crore between December 2018 and September 2019 as compared to the same period in the previous year (see chart)

“Besides this, the mounting overdues are a serious problem for the banks. This is an obstacle in recycling of funds with the credit institutions,” the SLBC report said.

It added that farmers in several places are waiting for the receipt of the waiver amount and it is likely that that they will start operating their accounts after getting their hands on it.

Subsidised seeds and fertilisers aren't available on credit against accounts that haven’t been renewed.

The SLBC report goes on to add that the crop loan outstandings of cooperative banks, the preferred channel for settlement under the loan waiver scheme, have registered the highest contraction of 13.52 per cent between December 2018 and September 2019.

“This trend compels the think tank as well as stakeholders (to assume) that debt waiver may result in dwindling credit discipline, which may be mitigated by passing on the benefit on time to all eligible farmers,” the report goes on to add.

States drag their feet on write-offs

In neighbouring Chhattisgarh, whose government also announced a waiver of farm debt around the same time as Madhya Pradesh, as part of its manifesto, agricultural advances dropped by almost Rs 315 crore between September 2018 and 2019, according to SLBC data, which again could be attributed to loan waivers.

Latest data for Rajasthan, the third state that had announced loan waivers along with Madhya Pradesh and Chhattisgarh, isn’t readily available.

The three states of Madhya Pradesh, Chhattisgarh and Rajasthan have promised to waive off around Rs 60,600 crore collectively over the next few years starting 2018-19, according to the latest RBI Internal Working Group.

Of this a sum of around Rs 28,300 crore--less than half, or 47 per cent of the promised amount--has been provided for in the three states' budgets till 2019-20.

In Madhya Pradesh, just around 36 per cent of the promised Rs 36,500 crore loan waiver has been provided in the first two budgets of 2018-19 and 2019-20, while in Rajasthan it is almost 100 per cent of the announced Rs 18,000 crore till 2019-20 (RE), the RBI data showed.

In fact, since 2014-15, as many as 10 states, including BJP-ruled Uttar Pradesh and Maharashtra had announced farm loan waivers of varying amounts totaling around Rs 2,36,460 crore. RBI data shows that of this, till 2019-20, a sum of around Rs 149,800 crore (63.35 per cent) has been provided for in the states' budgets during the past five years.

Clearly, most states have staggered their budget provisioning for farm loan waivers to lower the financial burden on their exchequers.

In fact, RBI data shows that between 2014-15 and 2019-20, farm loan waivers accounted for 0.4-1.8 per cent of the total expenditure of the 10 state governments that announced them.

These states are: Andhra Pradesh, Telangana, Tamil Nadu, Maharashtra, Uttar Pradesh, Punjab, Karnataka, Rajasthan, Madhya Pradesh and Chhattisgarh.

So far, according to RBI data, among the 10 states that announced waiver of farm loans since 2014-15, Tamil Nadu and Chhattisgarh have provided adequate budgetary supports for the programmes.

Impact on NPAs under agricultural advances in Madhya Pradesh 
Agency  Dec 2017 to Sept 2018 Dec 2018 to Sept 2019
Public-sector banks  707 1,269
Private banks 82 276
Regional rural banks  315 450
Cooperatives 16 2,073
Total  1,120 4,069
Figures in Rs cr; Source: State Level Bankers Committee Report



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