Farm Loan Waiver - No longer, the need.

 

                                  Courtesy: The Hindu

Farm Loan Waivers – No longer the need

B. Yerram Raju                                                                                   

From corporates to the individuals, irrespective of activity, want their loans to be waived. Who wants to live in debt? But can the economy giving such waivers live without debt? Simply put, a firm ‘No’. The rising public debt of the sovereign puts not just the present but the future citizen in debt for it is the next generation that has the responsibility to repay. Farm sector is not just exception, but the future is not just generation away but only a crop season away. This should clear the way for the argument against the loan waivers of any kind save very serious exceptions.

Politicians and farmers are good friends close to the elections and bad enemies to farm economics. Rahul Gandhi stirred the hornet’s nest at Warangal on the 6^th May while announcing that if Congress is elected to power in Telangana, it would waive off Rs.2lakhs for each farmer from his debt portfolio. Such slogans pre-elections are not new to the farmers, ever since V.P. Singh/Charan Singh duo indulged in crop loan write-off in 1990s. The scheme received the ire of Comptroller and Auditor General for its bad implementation. RBI repeatedly advised the political parties not to indulge in this luxury as the states do not have that much resource apart from encouraging bad borrower behaviour. But do all farmers look for such write-off? What exactly they need?

Doubling farm income remained a far-cry leading scores of farmers to double-up to Delhi to fight against what they considered as bad farm laws. The much-needed farm reforms that were bypassed during the first phase of reforms in the 1990s could have been triggered had there been political sagacity and cooperative federalism. Be that as it may, it has become difficult for governments to do what the farmers want, save the exception of government of Telangana, that I would explain latter. There are good number of farmers who took to mixed farming, organic farming, natural farming, and use of technologies intensely.

Farmer is generally short of cash at the beginning of the crop season. This leads him/her to go to the money lender who is wont to give credit on his own terms. The revenue from his previous crop would not be to hand at that moment as it would have been up for sale but not sold. If he had no dairy or poultry or allied activity to come to his rescue, even family would be on the brink of starvation despite his four or five acres of land!

Government of Telangana is the first government to think of giving Rs.10000 at the beginning of the season in cash. It also arranged for insurance against untoward calamity in the family while working on the farm -  may be a snakebite or an accident or loss in family up to Rs.5lakhs. Both these schemes are monitored by the Chief Minister to ensure that there is no slip up in the releases. The result is that farmer does not have to wait at the banker’s gate for a loan! On top, all the 789  Primary Agricultural Cooperative Societies in Telangana have been digitized and linked to core banking solutions of  around 298 DCCB -branches and State Cooperative Bank. This opened a reliable credit window for the farmers when credit is needed. Marketing paddy, the principal crop of the state is engaged in a street fight between the union and state. The result, however, is good as the farmers realized that they should go more for alternate crops that have better markets and yield better price. When asuras and devas churned the ocean, both milk and poison emerged and the churning is still on.

Illustratively, Saritha, a commerce postgraduate from Rapakapalle village in Hanumakonda district took to zero budget natural farming on her four-acre land. She collected rainwater to farm a fishpond; honeybee-keeping, polyhouse for vegetable cultivation and an acre of paddy cultivation. She established two retail outlets for her farm produce and multiplied her farm income. She is proud to say that she could hedge the risks of farming through mixed farming as one or the other agricultural activity gets her sustainable income year-long. She also influenced two thousand farmers in and around her village. There are many more of her ilk in Telangana.

Credit for farming is a necessary but not sufficient condition for sustainability because farmer’s liquidity is always locked up either in soil or silo. As long as farmer’s credit requirement is viewed in exclusion for production purposes alone, the empty valet of farmer stares at the banker. In spite of nearly five decades of engagement of banks with farmers, bankers have no trust in them. Similarly, farmers also lack confidence in banks that they would meet their genuine requirements in time. It will be interesting to see from the RBI data that the banks lent to farming mostly in irrigated tracts – nearly 83% of lending took place in just twelve states. National Bank for Agriculture and Rural Development (NABARD) took up watershed programme on a mission mode that helped many water-starved tracts could get crop-relevant water using latest technologies. Kisan Credit Card has become a fancy instrument that did not give credit comfort to the farmer. Revisiting this instrument and modifying its delivery mechanism is more imminent now than ever.

The banks’ concerns are equity and discipline while the farmers’ concerns are adequacy, timeliness, and multipurpose credit – production, consumption, and marketing. Farming unlike any other activity is prone to risks arising from natural calamities and each calamity is different in nature and dimension.

Chanakya in his magnum opus Artha Sastra clearly mentions that if a natural calamity like cyclone, holocaust, continuous drought for over two years, repeated floods, tsunami etc., it is the responsibility of the state to bail out the farmers by relieving him from all the debt and give cash to him for sustenance. He never advocated loan write-off as it would debilitate the farmer of his own capacities and creates trust-deficit with his lender. Strengthen the insurance mechanism for farming sector. Make available lending to farmer at no more than four percent per annum. Announce the produce price well ahead of the season. Interest reimbursement is a budget game and put an end to it.

It has become a fashion for all the political parties to announce loan write-off from the state exchequer. It is difficult to imagine that they are ignorant of the consequences. But they indulge in this political ploy. A responsible democracy like ours shall refrain from such sloganeering and Election Commission should impose a ban on such announcements.

The views are author’s own.

https://timesofindia.indiatimes.com/blogs/fincorp/farm-loan-waivers-no-longer-the-need/

 

 

 

Banking reforms the Budget should not miss

Banking Reforms the Budget should not miss

Former President of India, Pratibha Patil, in her address to the Lok Sabha on 4^th June 2009 said: “Our immediate priorities and programmes must be to focus on the management of the economy that will counter the effect of global (domestic) slowdown by a combination of sectoral and macrolevel policies.” She laid emphasis on accelerating growth that is ‘socially and regionally more inclusive’. 

The objective of overall policy in India is accelerated inclusive growth with macroeconomic stability. This approach is likely to reverberate in the ensuing Budget Session.

FM needs to give a measured response to the imperative outlined. In order to take the States on board, she may announce clearance of all the dues on GST to the States once the present audit of GST concludes. She may also like to give a new financial sector reform agenda to resolve the existing imbroglio. A few of the available options will be the focus of this article.

FM is at crosshairs between fiscal austerity and enhancing public spending to stimulate growth. Discomfort lies in the worst performance of Public Sector Banks (PSBs) and failure of NBFCs. While the RBI is balancing inflation and growth objectives, the recently released Financial Stability Report re-emphasis on the need for ‘good governance across board’, improving the performance of PSBs and the necessity to build buffers against their disproportionate operational risk losses.

None of the recent bank mergers added to her comfort. Hence there is need to look at the unfinished earlier reform agenda suggested by various Committees since 1991 and announce either a Reform Agenda or appointment of a High-Level Committee with a specific timeframe for actionable agenda that could stonewall criticism against the PSB failures, bank frauds and twin balance sheet problems. 

The issues surrounding banking are not peripheral.

The moral hazard consequence of banks receiving bailout is worrisome now and therefore, she may refrain from any further bailout announcement. Stress in the NBFCs and Cooperative banking seemed to have forced re-look at the Financial Resolution and Deposit Insurance Bill, 2017. While the Bill proposes to establish a Resolution Corporation to monitor the health of the financial providers on an ongoing basis, the bail-in by depositors and stakeholders is worrisome.

Increasing stress in various buckets of assets stands unabated and calls for a surgical strike. Banks’ credit origination risks need urgent evaluation. It is important to relook at the universal banking model the country adopted aping the west. Customer preferences and customer rights have taken a back seat.

Market-led reforms of the past have replaced social banking with profit-banking objective. 2025 $5trn GDP target should look at more efficient performance of banking as key to its achievement. There is a need for reconciling satisfactorily the dilemma of policies appropriate for short term with those suitable for the long term.

Governor, RBI in a recent address indicated that he would like to look at the priority sector categorization afresh to ensure that it delivers the intended. This assumes greater importance in financial inclusion agenda as efforts hitherto like Jandhan, Mudra etc could make only numerical and not qualitative advances. Provision of adequate and timely credit to the rural areas in general and agriculture, micro and small enterprises and weaker and vulnerable sectors, remained a major challenge for Indian banks for decades.

Direct credit programmes in Korea, Japan in 1950s and 1980s revealed the need for narrowly focused and nuanced programmes with sunset clauses delivered the results. The problem with directed credit is essentially three-fold: First, pricing at its true market level, second, avoidance of the persons who are not credit-constrained, and third, selection of focused areas and regions without political interference in undefined democracy.

Credit discipline and equity, the twin principles of credit dispensation suffered a systemic failure with politically motivated loan write-offs in several States. Both farm and micro and small enterprises require credit with extension, handholding, monitoring and supervision as key deliverable. This calls for out-of-the-box thinking.

While there has been broad recognition that increasing supply to cope with the rising demand through diversified lending institutions like small finance banks, and NBFCs of various hues, ever-increasing demand to cope with new technologies, low labour productivity, and absence of aggregators structurally to resolve the pricing of produce at the farmer’s doorstep, are all issues that require comprehensive solutions. Resources should not fall short of the requirement for such effort. Budget 2020-21 should make a bold and strategic announcement regarding the direction of investments in farm sector supportive for responsible credit flow. FM would do well to avoid announcing any crop loan targets and leave it to the RBI’s priority sector reformulation.

Supply-side issues cannot be adequately and appropriately addressed without institutional reforms focusing restructuring NABARD and giving a new mandate consistent with the future goals of the economy. SIDBI the second surviving DFI is living on interest arbitrage and enjoying the munificence of the Finance Ministry to the detriment of the sector it was intended to protect and promote. This also begs either closure or restructuring.

As regards governance of banks, the unattended reforms of Narasimham Committee -II deserve attention: Removing 10% voting rights; reducing the legally required public shareholding in PSBs from 51 to 33 percent; improving the Boards qualitatively with well-defined independent and functional directors’ roles.

Since the FM already announced that she is exploring the amendment to the Cooperative Act to skip the duality of regulation of cooperative banks by both the Registrar of Cooperative Societies and RBI, she would be going one step further in eliminating similar duality between her Department of Banking and RBI in so far as the PSBs are concerned, particularly because the RBI created separate Departments of Supervision and Regulation and College of Supervisors to improve the supervisory skills of RBI personnel.

the Hindu Business Line, 16.1.2020 https://t.co/eNEANVcaW8?amp=1