Join Courses
Attend Webinars
Get Free Counselling
  • Select Language
    • Hindi
    • Bengali
+91 9903 222 555
Elearnmarkets - Financial Market Learning
Join Courses Of Elearnmarkets
  • Basic Finance
  • Technical Analysis
  • Fundamental Analysis
  • Derivatives
  • Financial Planning
  • Miscellaneous
No Result
View All Result
  • Basic Finance
  • Technical Analysis
  • Fundamental Analysis
  • Derivatives
  • Financial Planning
  • Miscellaneous
No Result
View All Result
Elearnmarkets - Financial Market Learning
Home Fundamental Analysis

Farm Loan Waiver – A temporary solution to a permanent problem

Elearnmarkets by Elearnmarkets
May 31, 2019 - Updated on November 18, 2020
Reading Time: 7min read
0
1.8k
VIEWS
Share on FacebookShare on TwitterShare on LinkedIn

Farm loans are loans taken from the banks by the farmers for agriculture requisites and production. In a farm loan waiver scheme, the Centre or the state Government repays the loan to the banks on behalf of the farmers, simply by using public money collected in the form of taxes.

When there is a poor monsoon or natural calamity, farmers cannot repay their loans. Political party uses this problem during election time and promise loan waiver in their manifesto.

So, whenever there is lethal combination of Drought, farmer suicides and political uncertainty in India the topic of Farm loan waiver becomes the battlefield between oppositions as 60% of Indian population mostly bank on farming Income.

Loan waiver benefits individual farmers but on the other hand it can gobble India’s growing economy and banking sector.

Table of Contents
Impacts
Problem with the Agriculture Sector
Benefits of farm Loan waivers
Drawbacks of farm loan waiver
Election event and farm loan waivers
Farm loan waivers a nightmare for Banking Industry
Key Takeaways

Impacts

  • The loan waivers not only impact the banking sector but also impact the state’s finances. Banks don’t lose money in such waivers as they are fully compensated by the state exchequer, who bears the burden.
  • The farm loans are transferred from the assets side of banks’ balance sheets to the liabilities side of the government’s books as part of the waivers.
  • The loan goes out of the books of the bank and gets replaced by a bond issued by the state government. But for the state government, this is a debt obligation that has to be serviced by paying interest on these bonds.
  • States typically stagger loan re-payments over four to five years. This puts pressure on bank’s books, forcing them to put a lending squeeze.
  • Banks might gain in the short run as their loan book gets lighter and they get rid of some non-performing assets. But such waivers anticipation in future can damage credit culture.

Problem with the Agriculture Sector

Indian Agriculture sector has been facing several issues such as fragmented land holding, depleting water table, deteriorating soil quality, rising input costs, low productivity along with high dependence on monsoon.

The vagaries of the nature often lead to poor outputs forcing farmers to depend heavily on credits. That is when the vicious circle of loans and indebtedness begins.

Benefits of farm Loan waivers

farmer loan waiver
  • In India, agriculture is highly dependent on monsoons. Farmers take heavy loans for crop production. If the crop fails due to lack of rains or insufficient market demand, farmers get trapped in debt and it leads to Farmer suicides. Thus to overcome this government waives farm loans.
  • Many farmers are leaving farming due to better money making alternatives. If this situation continues, there will be serious food scarcity. To prevent this situation, the government needs to gain the trust of farmers. Thus Farm loan waiver seems the only option.
  • Many farmers borrow money from moneylenders at high-interest rates and get trapped in a never ending cycle of debt. Farm loan waivers help to divert these farmers to borrow money from banks instead of money lenders.

Drawbacks of farm loan waiver

  • Loan waiver sends a negative signal to the markets. Honest farmers, some of whom take more loans to repay earlier one, or use their saving to repay loans, feel cheated. It disrupts credit discipline. Farmers to turn into wilful defaulters due to the next loan waiver scheme, which is bad for economy.
  • The focus of such schemes is on small and marginal farmers. This ignores the dominant role of moneylenders and informal credit sources in the rural economy. The farmers who take loans from such sources are not benefitted from such schemes.
  • It increases the fiscal deficit of the state as the gross expenditure of state government exceeds the gross revenue which in turn causes low credit ranking for the state and so the cost of borrowing increases for the state.
  • Rich farmers to take loan even if there is no need, in the hope of the next loan waiver scheme. This impacts the farmers who are genuinely in need of loans.
  • Loan waiver is a relief only for one season, with the farmers going back to distress in the next season if the monsoon fails.
  • Loan waivers not only increase the fiscal deficit and interest burden of the states but also limit its ability to undertake productive capital expenditure in the agriculture sector. It affects the long term growth in the sector.
  • Providing loan waive in some states encourage farmers from other states to demand loan waiver even if they don’t need them.
  • Loan waivers are just a tool for politicians to gain vote banks in all elections and prevent them from coming up with the long lasting solution.

Election event and farm loan waivers

Governments – both at the central and state level – have written off loans.

Between 2014 and 2018, loan waivers were announced in 11 states, by both BJP and Congress administrations, at a total cost of more than a trillion rupees.

In the current election also, political parties started promising of farm loan waiver in their manifesto.

Earlier, this year, the promise of a loan waiver helped the Congress defeat the BJP in state elections in Chhattisgarh, Rajasthan and Madhya Pradesh in December.

Farm loan waivers a nightmare for Banking Industry

India’s first farm loan waiver was nearly three decades ago in early 1990. From 2016 to 2018 six state governments have declared farm loan waivers of upto Rs1, 19,000 cr.

Repeated occurrences of loan waivers hurt the credit culture in the country. Public sector banks are the worst affected because of their high exposure to agriculture and farm loans.

Constant occurrence of such populist actions leads to risks of impaired credit discipline and weak risk-reward for banks and reduced credit availability for borrowers.

Also Read : 15 ways to perform banking stock analysis

Farm loan waivers affect credit off take and induce further stress on banks. The farm sector nonperforming assets (NPAs) account for 16% of bank’s advances under the priority sector lending as of October 2018.

Further announcement of farm loan waivers by selected government can only worsen the situation of already beleaguered banks.

Take the case of the State Bank of India (SBI), the country’s largest lender. Its NPAs stood at 6.4% before June 2017 when farm-loan waivers were announced in UP and Maharashtra. By September 2018, this rose to 11.4%, according to a report by Macquarie Research.

After the farm loan waiver in 2012, the drop in bank’s agricultural bad loans or NPAs has rose up sharply once again.

Key Takeaways

  • If you are an investor in bank stocks, you may have to worry, as waivers may add to the already elevated non-performing assets of banks.
  • Farm loan waivers by government may appear to have benefitted the cause temporarily but is not a solution to mitigate agrarian distress.
  • Demand for loan waivers arises because income of farmers is not increasing at a reasonable rate.
  • Government has to focus on improving farmer’s income rather than use it in Political manifesto.
Tags: advanceagricultural sectorenglishfarmer loan waiver.farmers
Share4TweetShare
Subscribe To Updates On Telegram Subscribe To Updates On Telegram Subscribe To Updates On Telegram
Previous Post

Dynamic Asset Allocation Funds: Is this a useful investment strategy?

Next Post

25 Stock Market Terms a beginner should know

Elearnmarkets

Elearnmarkets

Elearnmarkets (ELM) is a complete financial market portal where the market experts have taken the onus to spread financial education. ELM constantly experiments with new education methodologies and technologies to make financial education effective, affordable and accessible to all. You can connect with us on Twitter @elearnmarkets.

Related Posts

Financial Statement Analysis

Share Warrants vs Rights Issue – What you should know?

January 15, 2021 - Updated on January 20, 2021
150
Fundamental Analysis

Annual Report – Smart way to decode company financial health

December 31, 2020
599
Fundamental Analysis

Buyback of Shares Meaning – Ways, Participation, Pros & Cons

December 10, 2020 - Updated on December 15, 2020
570
Fundamental Analysis

Business Models – Example, Types, Importance & Advantages

November 24, 2020 - Updated on January 15, 2021
590
Next Post

25 Stock Market Terms a beginner should know

Nifty hourly chart

Nifty Sells Off Partially In Run-Up To 1Q19 GDP Data After A Positive Week

Technical Indicator that reflect Volatility in the Market

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Follow Us

Download App

Register on Elearnmarkets

Continue your financial learning by creating your own account on Elearnmarkets.com

Register Free Account

GET ARTICLES ON EMAIL

Enter your email address:

Categories

  • Banking
  • Basic Finance
  • Bonds & Fixed Income
  • Budgeting & Savings
  • Capital Markets
  • Charts
  • Charts, Patterns & Indicators
  • Commodity, Currency & FOREX Market
  • Derivatives
  • ETFs & Mutual Funds
  • Financial Planning
  • Financial Statement Analysis
  • Fundamental Analysis
  • Macroeconomics
  • Market Analysis
  • Market Updates
  • Market Wrap
  • Marketshala
  • Miscellaneous
  • Open Interest
  • Personal Wealth
  • Retirement Planning
  • Sector Analysis
  • Tax Planning
  • Technical Analysis
  • Trading Terms, Rules & Strategies
  • Visit Elearnmarkets
  • Courses
  • Webinars
  • Financial Guides
  • Get Free Counselling

© 2020 Elearnmarkets All Rights Reserved

No Result
View All Result
  • Article Categories
  • Basic Finance
  • Derivatives
  • Financial Planning
  • Fundamental Analysis
  • Market Analysis
  • Miscellaneous
  • Technical Analysis
  • Select Language
    • Hindi
    • Bengali
  • Learn finance
  • Browse Courses
  • Webinars
  • Free Guides
  • Get Free Counselling

© 2020 Elearnmarkets All Rights Reserved

Republic Day Offer

Visit Elearnmarkets.com to view the offer