The Union government is planning the largest farm-loan relief package in the country’s history — totalling at least Rs 32,000 crore — and proposals to this effect will be unveiled when the budget is presented on February 29.
The package, which could end up totalling as much as Rs 90,000 crore depending on the final shape of the proposals, is at the core of efforts by the ruling United Progressive Alliance (UPA), and its largest constituent the Congress, to revive agriculture — and hopefully ride back to power in elections due in about a year.
People familiar with the process of creating the package say it will have several components — from a waiver of interest on some loans to the complete writing off of not just stressed assets (or bad loans) but even those loans that have been rescheduled.
As on March 30, 2007, the exposure of commercial banks to the agriculture sector was Rs 230,180 crore. The total value of agricultural loans could be to the tune of Rs 362,000 crore, including loans of cooperative banks and regional rural banks (RRBs).
The UPA came to power in 2004 riding a promise of a “new deal for rural India” by increasing investment in agriculture and stepping up credit flow to farmers.
<b1>Commercial banks have non-performing agricultural loans of more than Rs 7,500 crore. However, cooperative banks and RRBs, major dispensers of farm loans, have larger non-performing assets (NPAs) related to agriculture. Industry estimates put overall NPAs in the sector at around Rs 31,000 crore. And at least another Rs 30,000 crore worth of farm loans have been rescheduled thus far under various schemes.
Loans that have not turned into NPAs but are "overdue" for repayment add up to another Rs 40,000 crore. The government plans to address this chunk of more than Rs1 trillion of farm loans through its relief package.
The package is being put together by officials from the ministries of finance and agriculture, the banking regulator, Reserve Bank of India (RBI), and the apex agricultural bank National Bank for Agriculture and Rural Development (Nabard), but none of them is willing to go on record with the details given the sensitivity of the subject.
Any package aimed at the agriculture sector has significant political ramifications, especially given that the UPA government could choose to go to the polls before the end of its five-year term. That means, Budget 2008-09 could well be this government's last. The previous government, the BJP-led NDA lost the last elections after running a high voltage "India Shining" campaign that backfired in rural India.
The exact contours of the scheme are still evolving but people associated with it are emphatic that it will not require banks to make a huge sacrifice. While there will be interest waivers and write-offs, the government will bear the burden by making a budgetary provision for these and RBI will monitor the entire process. It will pass on the money to individual banks on the firm understanding that they will extend fresh loans to farmers. "There will be no compromise on this," said one expert who has been consulted on this. Currently, farmers get small loans up to Rs 2 lakh at a concessional rate of 7 per cent but government offers 2 per cent subsidy on such loans to banks through RBI.
"Banks may have to forego a small part of their exposure to the sector which (has) turned bad and for which they have already made provisions," the expert said.
The other critical feature of the package will be a nominal amount (it could be 10 per cent or more) that borrowers will have to pay as a precondition to have their loans written off. Finally, there will be a cut-off point for farm loans to be eligible for such benefits. "The entire process will be transparent," said a government official.
This is not the first time the government has doled out concessions to farmers in the budget but what makes the planned package unique is its magnitude.
In 1989, the Janata Dal government floated the first ever agriculture loan write-off scheme. A brain child of the then deputy PM and minister of agriculture Devi Lal, the Agriculture and Rural Debt Relief Scheme, 1990, waived loans up to Rs 10,000 issued to farmers, landless cultivators, artisans and weavers by state-run banks.
Till 1992, over 44 million farmers benefited from this scheme to the tune of close to Rs 6,000 crore. By law, Indian banks are required to allocate to agriculture 18 per cent of the amount they give out as loans. Banks that fail to meet this target have the option of investing the shortfall in the Rural Infrastructure Development Fund, managed by Nabard.
In 2004-05, Finance Minister P. Chidambaram exhorted banks to increase agricultural loans and asked them to double the quantum of such loans in three years. Over the past two years, till 2006-07, the number of agricultural loans rose by 36.4 per cent and the amount loaned by close to 80 per cent. However, these measures have proved insufficient and the indebtedness of farmers has grown on account of rising input costs and low returns.
Between 2001 and 2005, 86,922 farmers committed suicide; of this number, 54% were from four states, Andhra Pradesh, Karnataka, Kerala and Maharashtra. The suicide rate among male farmers rose from 12.3 per 100,000 in 1996 to 18.2 in 2005. Immediately after coming to power, in June 2004, the UPA government rescheduled about Rs 20,000 crore worth of farm loans. It asked banks to add overdue interest to the principal amount and recover the money in five years with a two-year moratorium.
Again, in July 2006, Prime Minister Manmohan Singh announced a relief package for distressed farmers in 31 districts across Andhra Pradesh (16 districts), Karnataka (6 districts), Kerala (3 districts) and Maharashtra (6 districts). The package was worth Rs 16,978.69 crore - Rs 10,579.43 crore as subsidy and Rs 6399.26 crore as loan. The critical component of the package was the waiver of interest on overdue loans up to July 2006 to the tune of Rs 2,718 crore. This was shared equally between the Centre and states.
The government also rescheduled overdue loans to the tune of Rs 9,052 crore over three to five years with a one-year moratorium. And commercial banks committed fresh credit commitments over Rs 20,000 crore to these affected districts. "The first installment of loans rescheduled in 2004 and 2006 would be due by the end of the current fiscal year after the moratorium period is over but the farmers are in no position to pay," said an agricultural banker.
The government's concern over farm loans is understandable in the context of a sharp decline in the share of agriculture in India's GDP, from 41% in 1971-72 to 19.6% in 2005-06 and an estimated 18.5% in 2006-07 and 17.47% in 2007-08. However, in terms of employment, agriculture's share has declined, but much more gradually, from 73.9% in 1972-73 to 56.6% in 2004-05.
According to people familiar with the development, the relief package has taken into account recommendations of the Expert Group of Agriculture Indebtedness, chaired by R. Radhakrishna, director, Indira Gandhi Institute of Development Research. The group, created by the finance ministry in August 2006, submitted its report last year.
The group's recommendations include rescheduling farm loans to all affected families, disbursement of fresh loans, and waiver of interest liability by up to two years for both short-term and long-term loans with the burden be shared by the central and state governments.