Recent trips to Anantapur district in Andhra Pradesh have shown me that the agricultural credit system in India is an unholy mess. There are brokers outside banks who extend cash to farmers at exorbitant interest rates for just a few days so that the perfunctory “loan renewal” can take place. This is a bank transaction, in the books mainly, wherein a farmer pays the interest amount of a crop loan so that the bank can show one loan to be closed and a fresh loan issued.
If the farmer is lucky, with a revised scale of finance applicable for the crop selected, the bank will pay the difference of Rs 3000-5000 per acre to the farmer against the fresh loan shown to be issued. This additional amount that the farmer takes might very well end up servicing the borrowing from the broker outside the bank. For the rest of the agricultural season, the farmer is obviously depending on other sources of credit since what has happened in the name of ‘loan renewal’ is a book transaction.
I have also discovered something more distressing – farmers taking each other to police stations and lodging complaints in the context of bank loans. When banks insist on a zamanat or guarantee from another farmer, farmer X might approach farmer Y for such a surety. It is obvious that farmer Y who agrees would have done so because there is a cordial, trust-based relationship between X and Y. But when farmer X does not repay the bank loan – including because of successive drought years, like in the case of Anantapur, which last year experience its sixth consecutive drought – and farmer Y is barred from taking his due share of credit from the bank because of X’s default, Y ends up lodging police complaints against X. What was a peaceful relationship has been turned into one of strife in small farming communities thanks to our banking system failing to follow a simple RBI guideline of not asking for any other collateral for crop loans upto Rs 100,000 since the crop value itself is supposed to be the collateral. However, banks don’t follow this and are insisting on guarantors, if not land titles, to extend farm loans.
Indebtedness of farm households
Between 2003 and 2013 (59th and 70th NSSO rounds), the proportion of indebted households amongst agricultural households increased to 52% (4.7 crore agri households) from 48.6%. The average outstanding amount per household increased from Rs 12,585 in 2003 to 47,000 in 2013. However, there was only a minuscule improvement in institutional agricultural credit in this period.
Importantly, 82% of all indebted agricultural households are those which possess less than two hectares of land (3.84 crore such households, whereas in the other land categories, it is just 84 lakh households). While the average outstanding loan per household amongst small and marginal farmers is Rs 36,300, the average for all other households stood at Rs 189,300.
NSSO data also tells us that 47.4% of marginal and small farmer indebted households are indebted to non-institutional sources, whereas only 30.4% of other indebted farm households are indebted to non-institutional sources giving a clear picture of exclusion from institutional credit of the most marginalised.
While debt itself may not be construed as a problem, it is clear that debt burden (debt to asset ratio) is intensifying on farmers over the decades.
Agriculture credit being usurped by non-farmers
While this is the picture from the farmers’ side, it is also clear from RBI data that more than half of what is extended as agri credit is actually being disbursed to non-farmer corporate borrowers (this can be deduced from the number of large sized loans occupying agriculture credit space). It might actually be the case that some such corporate borrowers within the priority sector lending portfolio from the banking system become usurious moneylender on lending further to farmers, including as input dealers.
Freedom from debt to be ensured
What we need is a deep-seated solution to the problem of farmers’ indebtedness. As an immediate relief at a time of acute crisis, loan waivers are indeed necessary.
Since loan waiver typically covers only institutional loans, using the NSSO estimates, it can be seen that the small and marginal farmers, who constitute 82% of all farmers, would get at the most Rs 67,469 crore in benefit, whereas the larger farmers, who constitute 18%, would get up to Rs 1,19,115 crore.
It is clear that loan waivers need the Centre to support such a measure at least by a 50% contribution.
Debt swapping as an important option
Debt swapping is the other option that needs to be considered seriously by all governments. The idea of debt swapping is to be discussed in a context when institutional loan waivers are not likely to benefit marginal and small farmers as much as they benefit other farmers. If we consider the outstanding informal loan amount, the small/marginal farmers have a total of Rs 71,923 crore outstanding (higher than their loans from institutional credit sources) whereas the larger farmers have Rs 36,897 crore.
Also read: The Downside of Repeated Debt Waivers
Several studies have already thrown up the fact that it is this category of farmers who are mostly committing suicides in India. There is also a responsibility on the state to begin discussing the modalities of lessening the debt burden on farmers from the non-institutional sources, since it has been the failure of the establishment as a whole (government, RBI as well as all the banking institutions put together) that these farmers have not been able to access institutional credit for their various needs.
There is a precedence and prior experience of the Kerala state government implementing a farmers’ debt relief commission. The Kerala government adopted a Farmers’ Debt Relief Commission Act in 2006, subsequently amended in 2008 and 2012 to extend its functioning. This provides a model for an institutional mechanism to address farmers’ indebtedness, rather than one-time loan waivers as ad hoc measures. Each year, the debt relief commission operates in districts that are identified as distress districts. The commission deals with both institutional and non-institutional loans.
The Act empowers the commission to “fix, in the case of creditors other than institutional creditors, a fair rate of interest and an appropriate level of debt, to be payable as the commission may consider just and reasonable by a farmer declared as distress affected or related to an area or crop declared as distress affected area or distress affected crop…”. Once the level of outstanding debt is determined, the commission undertakes conciliation between the two parties and a binding award is passed.
Loan waiver, interest rate relief, loan rescheduling or loan moratorium are all instruments that can be used by the commission. Further, the commission recommends to the government the extent of debt relief to be provided, including taking over the partial or entire debt and exonerating the farmers from the effect of the debt. Such debt swapping, both for individual farmers as well as through joint liability groups and self help groups’ modality, with terms of repayment being reasonable and realistic is very much required.
Effective and continuous debt relief measures
It is also clear that institutional loan waivers and debt swapping would be effective only if various other measures that prevent farmers from falling back into an unbearable situation of indebtedness can be put into place.
It is noted that there is no equivalent of ‘non-recourse’ loans in agriculture credit even though it is one of the most risky professions, that too in this age of climate change. While in the formal sector, there is always limited liability on the entrepreneur, in agriculture, farmers face unlimited liability. Farmers need credit products that they are at least partially exempt from repaying whenever there are disasters and losses.
Similarly, to reduce the need for borrowing, farmers should be incentivised to shift towards low-cost, low-external input ecological agriculture. Another important requirement is to ensure that we have effective crop insurance and disaster compensation mechanisms because the very next season after a loan waiver, farmers might find themselves incurring total losses due to a natural calamity.
It is time that permanent farmer debt relief commissions are set up to look at immediate relief through loan waivers and debt swapping but also to address medium and long-term measures to be adopted to ensure that farmers’ debt burden does not push them into a deep distress from where suicides are seen as the only option left.
The author acknowledges inputs from Kiran Vissa, co-convenor of Alliance for Sustainable and Holistic Agriculture.
Kavitha Kuruganti is a co-convenor of Alliance for Sustainable and Holistic Agriculture.