Loan Waiver and Farmers’ Suicides

In this article, we examine why loan waivers are considered as inefficient measures to tackle the issue farmers’ suicide.

Learning from the past (2008 loan waiving policy)

Loan waiver on one side is seen as solution to all the financial problems of the farmers, on the other side people are apprehensive about the success of this policy considering the impact of 2008 farm loan waiver policy. In 2008, the UPA-I government had decided to waive off the loans of farmers, putting a burden on exchequer close to Rs. 65000 crore. The outcome of this policy is as follows:

• Loan performance– Despite of 100% debt waiver, the default rate of loans remained as high as before. The most probable reason for this could be either driven by continued distress or because of strategic behaviour caused by expectations of future waivers.According to a paper published by the Indian Statistical Institute in 2013, there was deterioration in the repayment of loans after the loan waiver of 2008.It said all three groups ‑ small and marginal farmers, bigger farmers, and farmers who had not defaulted on their loans took longer to repay their loans after the loan waiver.
• Rejection of the loan application– Practically speaking, since the chances of default is higher in farmers who had done so earlier, loan officers reject their applications. And these people are mostly small and marginal farmers. So, eventually the debt relief goes to fewer farmers, which is the exact opposite of what the government had intended to achieve.

• Financial burden– This policy will lead to creation a huge financial burden since by writing-off of huge loans as part of the waiving policy is taking toll on the banks by increasing the non-performing assets of commercial banks.
• Excludes small farmers– A significant number of marginal and small farmers are out of the formal credit net and are largely dependent on local money lenders who charge exorbitantly. It is neither desirable nor practicable to waive-off the amount borrowed from local lenders therefore efforts should be made to bring these farmers into the bracket of government sponsored schemes.
• Flaws in banking norms – Banks do not lend money to small and marginal farmers owning less than four acres. Or to those whose tenancies are not clearly defined. This compels those farmers to turn towards the private sources, which ensures that even a small segment of farmers will remain in forever debt.

Hence, it can be seen that it is not to be denied that such plans would provide a temporary relief to the farmers but it would surely hit both the farmers and the government in the long run.

Conclusion

After the careful consideration of the matter it appears that there are still some other existing problems which need to be dealt first since financial crisis is not the only problem. Moreover, the other problems such lack of better irrigation facilities, use of obsolete technology, and lack of awareness are the root cause of the financial crisis which pushes farmers into the continuous cycle of debt. Therefore, despite of adopting such polices of waiving the loan amount, the government should focus more on initiatives such as developing an open market for agricultural produce, increasing coverage of crop insurance, building rural roads etc., which is likely to be useful to the farming community. And once this basic need of the farmers is achieved there will be no further requirement to adopt any more policies.