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Editor's Insights

States in mess, banks in puzzle : Farm loan waiver is farmers` trap


With farm loan waiver, if our politicians are really aiming a better living for our farmers, who work for making our country food abundant, then they must rethink about this huge task. Loan waiver is counterproductive and in a real sense, it is an anti-farmer gesture. The “write-off” offer makes the farmer’s life-time defaulter and leads to worsening their character. Farmers naturally stop repaying with an anticipation that the loan would be written off since a new government comes in. That makes farmers default and spoil their creditworthiness eventually. Let the farmers not get carried away by such promises.


The world has gone much ahead. Yet our honorable politicians are reluctant to understand some facts. They are seemingly unwilling to stay out of the box of old thinking. They embark on a peculiar jingle to easily win elections though they don’t bother economic consequences of some of their actions and promises. The promise of farmers’ loan waiver is one of the best examples. It is an utterly bad economics. It is utterly a dirty politics by any standard. The combination of dirty politics and bad economics renders no less than a serious economic disaster. It is high time to understand the economic logic and the bad consequences of their foul measures.

Loans given by lenders are not lenders’ money or out of the public exchequer. That is the money of depositors, who include people of all sections – from poor farm labourers to super rich businessmen. Banks are supposed to return them when they demand their money. On the other side, borrowers are given a fixed time for return of their liabilities unlike their lenders’ liabilities which are to be paid upon their depositors’ demands. This is how the banking business works. No lender can forget or write off their assets – the loans, at any point of time. The write-off in banking parlance does not have meaning of “forget the loans”. Banks have to recover that money at one point of time. After taking loan no borrowers can enjoy the money with an expectation that our favorite politicians would come one day to set them free from the liabilities. This doesn’t mean political calls deserve to be rebuked. But let us understand some facts.

When at least some of our politicians boast of having fairly good knowledge of economics, we earnestly need them to advise their colleagues about the unworkable and counter-productive economic measures. But they are sadly silent about their fellow politicians’ call for senseless loan waiver. That is another disaster. It is not so simple to waive off any loan – be it of a size of rupee or a trillion. At the most, what a lender can rethink of is to work out an alternate relief measure by a cut in interest rate or forgetting the late payment penalties or amnesty for repayment of principle amount for some times after paying the interest incurred on the principle outstanding. Beyond this, anything is impossible for them. But the promise of waiving off all loans is a disaster for many reasons

If States want farmers to be saved from their trouble, let them offer special incentives through direct transfer of interest subsidy to those farmers who pay up their dues on time, instead of writing off their loans with compensatory payment to banks.

Close to the election time, since the day politicians promise loan waiver, farmers stop repayment. The farmers who used to make repayment religiously until the day suddenly begin to default even if they have money to repay. These farmers do not know that their single default makes their individual credit rating poor. That makes them ineligible for another loan in future and also lands them in difficulties in the next round of loans. Thus, the action worsens the debtors’ character and eventual trouble for farmers. At the same time, thousands of branch level managers come under pressure to handle the situation. Hence, instead of loan waiver, the responsible politicians and lawmakers must think of some other alternate measures, which can strengthen the lending system by which the debt-ridden farmers gain better credit worthiness. That will make them bargain with lenders. It is natural that every lender will run after quality borrowers.

Farmers’ access to bank loan also will be better. The loan waiver requires repayment of equal amount by those who have promised it – essentially the government- on behalf of the borrowers. That is involvement of a huge sum. If the same size of fund is deployed for other welfare or promotional measures, we can improve the socio-economic conditions of our farmers. With the fund earmarked for loan waiver, the government can extend a special interest subsidy for farmers on condition of disciplined repayment. That will encourage them to repay their loans on time. Instead of directly waving off the loans, the same fund can be used for cash transfer to those who had to repay huge loans, which they paid on time. That can trigger a farm loan boom.


Rural indebtedness

State polls Vs lenders’ recovery task

The crocodile tears on rural indebtedness continue to flow. Then comes politicians’ new promises – ultimately to win votes. After coming to power, they search for ways to implement what they promised. Many times, after coming to power, they realize the fact that making a sweet promise is as easy as a simple mouth service, but delivery is as tough as climbing the Himalaya

Rural indebtedness happens mainly because of poor delivery of services by their legislative representatives called law-makers, poor management of rural self-governing bodies, public servants and the rustic’s over dependence on private money lenders. The Mudra loans could hugely bridge the gap to a great extent. Commercial banks, which lend others’ money to borrowers are not supposed to carry the burden of others’ failures on their shoulders. Banks should not be made as inadequately fed mulching-cows. They are commercial institutions accountable to their depositors and also shareholders. They balance the system of borrowing and lending by the industries besides funding the agriculture sectors as far as possible for economic growth. Like agriculture sector, some small industries also often suffer from crisis. But in the name of crisis the short-cut solution of loan waiver is not logical to be what is called populist in political parlance

Nevertheless, there should be some more sensible alternate measures that could be prudentially popular to ensure that the system is strong enough to support the underprivileged classes. The present environment, wherein minimum support price for government procurement is higher; crop insurance covers unforeseen eventuality. Loan on lenient terms for rural people or the farming community ensures that none are easily vulnerable to any trouble

There are organizations which can mobilize farmers to join agitation. They can agitate for days and days standing behind well-dressed and financially well-off leaders. Some leaders are adequately enlightened about the root of the core issues and where the solutions lie. But these leaders will never spend their time for enlightening the farmers and rural community about how and what can avoid their miseries. They must have taught the poor and uninformed rural masses about what can make them creditworthy; what are the disciplines they must adopt in their work and financial management; how they can create a self help group (SHG) and work for credit-linking with financial institutions, etc. Instead of working on these matters, they resort to provoke farmers to stop paying their loans. That is not a service but assurance of landing them in deeper trouble

Many reports said, farmers had stopped repaying loans in those States where elections were due. But many farmers did not know that the reluctance of repaying their dues would be suicidal for them. Let the law makers be prudent.

UDAYKUMAR


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