Farm Loan Waiver Row, RBI Criticises and NPA’s Come Down

A few days prior to the start of loan waivers by UP government, the Reserve Bank of India (RBI) had said that ‘farm loan waivers by provincial governments may result in possible fiscal movement and weaken the quality of public spending’.

India's largest state by population Uttar Pradesh, along with Punjab, Maharashtra, and Karnataka have announced loan waivers for farmers.

The union minister for agriculture had already made it clear, that states would have to find their own resources to fund farm loan waivers. The Minister had focussed upon low-interest rates than loan waivers.

JLN Srivastava former secretary of agriculture had already questioned the legitimacy of loan beneficiaries in India. According to him “most of the farm land owners are not agriculture practitioners and merely nine to 10 per cent of them are involved directly in agriculture practices”.     

NPA in Agriculture

Unlike other sectors of trade, agriculture has a different set of standards for non-performing assets (NPA’s).

For short duration crops like paddy and jowar, if the loan is unpaid for two crop seasons, it is termed as an NPA; and for long duration crops, NPA’s are classified from one crop season, if the loan remains unpaid.

Data by the RBI for State Cooperative Agriculture and Rural Development Banks by march-end (NPA’s to loan ratio) and June-end (recovery ratio) suggests the following NPA and respective recovery ratio.

(Source: RBI)

(Source: RBI)

The data indicates an increase in recovery ratio and a little fall in the NPA’s of state cooperative agriculture and rural banks (primary loan providers for farm purposes). The problem that still exists is the identification of real agriculture practitioners and not the farm land owners.

On the other hand, RBI’s third bimonthly monetary policy statement had said, that given the limits on raising market borrowings and taxes by states, "farm loan waivers are likely to compel a cut back on capital expenditure, with differing implications for the already curbed cycle of capital expenditure".

It is also noticeable that the retail inflation was at a historic low level of 1.54 percent in June. In the midst of everyone getting in with different point of views, Hukumdev Narayan Yadav, chairman of the parliamentary standing committee on agriculture had already expressed his view to BW Businessworld, about partial farm loan waivers as an ‘important measure to give quick relief to farmers in distress and it cannot be seen as permanent practice’.