Recently the Governor of RBI was heard talking in a conference about the ineffectiveness of loan waivers. Some others say it is futile and corrupts the banking culture. The report of CAG supports their argument when it noted that much of the money was spent on waiving debts of non eligible farmers, many of whom had taken loans for non-agriculture purposes while many eligible farmers were denied.
But then this problem is just one of the discrepancies and mismanagement. Alright these things may be corrected with better monitoring mechanisms. But the problem is much more deeper than what is thought. The waiver is generally routed through institutional channels but the small farmers who own less than a hectare and account for 67 percent of farmer population are provided only between 15 to 50 percent of loans by these institutions.Bulk of their credit is provided by moneylenders, relatives and traders. None of these channels come under debt-waiver programme. Then Mr Governor is right in his concern and debt waiver becomes a strategic fault and can be misused by farmers in general elections as feared by some economists. All these things show that problem is not of debt waivering if targeted to eligible farmers, it’s about the monitoring and ineffectiveness of farm credit system.
All India Rural Debt and Investment Survey 2002 cautioned us about the coming back of moneylender culture. But why do farmers go to moneylenders in first instance when the rate of interest offered is very much higher than that offered by formal institutions. It is because of the more flexible repayment schedules as well as fewer restrictions of borrowing for consumption. Hence informal rural finance will continue to play a major role in India just as system of payday loans continues in US. Then the problem is of financial inclusion. All the farmers must be incorporated in the formal credit system with special focus on small and marginal farmers. Procedure for documentation of agriculture loans should be further simplified. Simultaneously farmers must be enabled to use modern technologies and improved agriculture practices for increasing production which will ensure timely repayment of the loans. But when there is extreme weather condition affecting the crops, assistance to eligible farmers musto be readily available in the form of insurance money or debt waiver.
Debt waiver or any kind of cash compensation is not flawed by its nature but because of inefficient system which monitors and implements it. A person who is solely dependent on agriculture for his livelihood can not be denied help just because the system is inefficient in stopping leakages. Make the system by adoption of region specific strategies and rationalising lending policies and better monitoring of insurance schemes and waivers.
Image credits : the hindu business line