4.1 Rural Credit in India: Problems, Measures and Farm Loan Waiver Scheme

Problems of Rural Credit in India:

1. Insufficiency:

In spite of expansion of rural credit structure, the volume of rural credit in the country is still insufficient as compared to its growing requirement arising out of increase in prices of agricultural inputs.

2. Inadequate Amount of Sanction:

The amount of loan sanctioned to the farmers by the agencies is also very much inadequate for meeting their different aspects of agricultural operations. Considering the amount of loan sanctioned as inadequate and insignificant, the farmers often divert such loan for unproductive purposes and thereby dilute the very purpose of such loan.

3. Lesser Attention of Poor Farmers:

Rural credit agencies and its schemes have failed to meet the needs of the small and marginal farmers. Thus, lesser attention has been given on the credit needs of the needy farmers whereas the comparatively well-to-do farmers are getting more attention from the credit agencies for their better credit worthiness.

4. Growing Over-dues::

The problem of over-dues in agricultural credit continues to be an area of concern. The recovery of agricultural advances to various institutions is also not at all satisfactory. In 1997-98, the recovery of agricultural advances of commercial banks, co-operative banks and regional rural banks were 63 per cent, 66 per cent and 57 per cent respectively. Such growing over-dues has also been resulted from poor repaying capacity of farmers. As a result of that, the credit agencies are becoming wary of granting loan to farmers.

5. Inadequate Institutional Coverage:

In India, the institutional credit arrangement continues to be inadequate as compared to its growing needs. The development of co-operative credit institutions like Primary agricultural credit societies, land development banks, commercial banks and regional rural banks, have failed to cover the entire rural farmers of the country.

6. Red Tapism:

Institutional agricultural-credit is subjected to red-tapism. Credit institutions are still adopting cumbersome rules and formalities for advancing loan to farmers which ultimately force the farmers to depend more on costly non-institutional sources of credit.

Measures Taken to Improve Credit Flow to Agriculture:

In order to improve the flow of credit to agriculture, the Government has introduced the following measures in 1998-99:

(i) Procedural simplification for credit delivery has been made (as per R.V. Gupta Committee Report) through rationalization of internal returns of banks.

(ii) More powers have been delegated to branch managers to raise the credit flow to agriculture.

(iii) Introduction of composite cash credit limit to farmers, introduction of new loan products with saving components, cash disbursement of loans, dispensation of no due certificate and discretion to banks on matters relating to margin security requirements for agricultural loans above Rs. 10,000.

(iv) Introduction of at least one specialized agricultural bank in each state to cater to the needs of high tech.

(v) Introduction of cash credit facility.

(vi) Insuring Kisan Credit cards to farmers to draw cash for their production needs on the basis of the model scheme prepared by NABARD.

(vii) The Government has made arrangement for hassle free settlement of disputed cases of over dues.:

(viii) To augment Rural Infrastructural Development Fund (RIDF) with a corpus of Rs. 10,000 crore with NABARD to finance rural infrastructure development projects by states.

Thus, the flow of institutional credit for agriculture and allied activities which was Rs. 31,956 crore in 1997-98 is estimated to have increased to Rs. 64,000 crore in 2001-02. The total credit now from all agencies is projected to reach the level of Rs. 82,073 crore by 2002-03. The total credit now to agriculture during the period 1997-2002 is likely to be of the order of Rs. 2,33,700 crore which is close to the Ninth Plan projection of Rs. 2,29,750 crore.

For the Tenth Plan period (2002-07) the credit flow into agriculture and allied activities from all banking agencies is projected at Rs. 7,36,570 crore, which is more than three times the credit flow during the Ninth Plan.

Farm Credit Package:

The Government of India announced the “Farm credit package” in June 2004 which aimed at doubling the flow of institutional credit for agriculture in the ensuing three years. Accordingly, the credit to the farm sector got doubled during two years, i.e., from Rs. 86,981 crore in 2003-04 to Rs. 1,80,486 crore in 2005-06, as against the stipulated time period of three years. The credit flow continued to increase at Rs. 2,29,400 crore in 2006-07 and then to Rs, 2,64.455 crore in 2008-09.

Farm Loan Waiver Scheme, 2008-09 and Farmers’ Debt Relief Fund:

The Government of India, in its budget 2008-09, has introduced a complete debt waiver scheme for small and marginal farmers to the extent of Rs. 50,000 crore of loans overdue from commercial banks, RRBs and cooperative credit institutions as on 31st December, 2007 and a onetime debt relief scheme at the rate of 25 per cent for large farmers to the extent of Rs. 10,000 crore.

Initially, the Government was silent over the matter that how this big amount of loan waiver will be financed. Later on, on March 27, 2008, the Government decided to setup a Farmers’ Debt Relief Fund (FDRF) with an initial corpus of Rs. 10,000 crore to implement the farm loan waiver scheme announced in the budget to help about four crore peasants.

The government will initially provide Rs. 10,000 crore to the Fund, which has been earmarked in the supplementary demands for grants for 2007-08. This fund would be augmented by another Rs. 50,314 crore in the next four years to compensate the banks and other lending institutions on account of losses resulting from farm loan waiver scheme.

This loan waiver scheme will be implemented by June 30. This debt waiver and debt relief scheme will benefit 3 crore small and marginal farmer and 2 crore other farmers.

Again on May 23, 2008, the government brought large farmers in the ambit of its farm loan waiver scheme by expending the package by nearly 20 per cent to Rs. 71,680 crore. Under the modified scheme, all farmers, including big ones, in 237 identified districts will get a deft relief of 25 per cent of the outstanding amount or Rs. 20,000 whichever is higher. The scheme will benefit over four crore small, marginal and other large farmers and will cost the exchequer a total of Rs. 71,680 crore.

In addition to Rs. 10,000 crore that has been earmarked in 2007-08 for funding the scheme, the government will provide Rs. 15,000 crore each in 2008-09 and 2009-10, Rs. 12.000 crore in 2010- 11 and Rs. 8,314 crore in 2011-12. It has also been stressed that “Upon being granted the debt waiver or signing an agreement for debt relief under the One Time Settlement (OTS), the farmer would be entitled to fresh loans from their banks.”

As per the scheme, all farm loans disbursed by banks and co-operatives up to March 31, 2007 to an estimated three crore small and marginal farmers will be waived. Here marginal farmers are defined under the scheme as those holding up to one hectare of land, while small farmers are those who have 1 to 2 hectare under their possession.

Under the OTS scheme for the farmers, they will get a rebate of 25 per cent on their farm loan if they pay the balance 75 per cent of their outstanding loan. About 3.68 crore farmers have been benefitted from this debt waiver and debt relief scheme involving debt waiver and debt relief of Rs. 65,318 crore.

Criticism:

However, the farm loan waiver scheme has also been questioned on various grounds:

(i) The full waiver of loan only applies to losses taken by farmers from commercial bank’s, RRBs and cooperatives owning 2 hectares (5 acres) or less but completely ignores the distress of other farmers who have taken loan from private money lenders;

(ii) This 2 hectare ceiling is reasonable for fertile irrigated land but the same is again unreasonable for un-irrigated low quality land with small yields such as the “suicide belt” of Vidarbha in Saurashtra, Andhra’s, Rayalaseema or south Karnataka;

(iii) Such bonanza or doling out money will also discourage bank-finance on the part of bank and similarly may raise expectation of future waiver of such loan and more so the banks will also try to increase, “risk premium” that is built into its loan system.

(iv) The scheme is also criticized on the ground that instead of doling out such a big account of fund, it would have been better to utilize this fund for developing permanent infrastructures for small and marginal farmers to make it much more productive.

It has been observed that our past experience of such loan waiver policy did not give much relief to the poor farmers. Thus it is felt that the country’s agriculture policy needs to be redressed thoroughly through rational principle rather than doling out of huge amount of money with uncertain prospect, raising the increasing burden on the tax payer and also raising fiscal deficit of the future governments.