Farm Loan Waivers and Their Impact on India’s Credit Culture

Farm Loan Waivers Latest News

• The Maharashtra government has announced a ₹35,000 crore farm loan waiver scheme, raising concerns about its impact on credit culture and state finances. 
• The move comes despite earlier warnings from the Reserve Bank of India (RBI) and expert groups against such waivers.
• The waiver for loan defaulters is estimated to cost around ₹20,000 crore, while the ₹50,000 incentive for farmers who regularly repaid their loans will require another ₹15,000 crore, taking the total expenditure to about ₹35,000 crore.
• Although the state government claims its financial position is strong enough to bear the cost, experts warn that the growing trend of farm loan waivers across states could have broader negative consequences for fiscal discipline and credit culture.

Farm Loan Waivers in India: Trends and Implications

• Farm loan waivers have increased significantly since 2014–15, mainly through state government announcements, although the Central government initiated two nationwide waivers since 1990.
• The main objective of farm loan waivers is to reduce farmers’ debt burden, enabling them to restart productive investments and improve economic activity.
• According to the Reserve Bank of India (RBI), loan waivers are not a permanent solution to farmers’ financial distress caused by climatic risks and market fluctuations.
• Over the last 35 years, both the Centre and states have spent around ₹3 lakh crore on various farm loan waiver schemes.

Political Timing of Waivers

• Farm loan waivers are often linked with electoral politics. 
• An RBI Internal Working Group (2019) noted that many waivers were announced close to elections, including the nationwide schemes of 1990 and 2008 and several state waivers since 2014.

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Central Government Farm Loan Waiver Programmes

• The first major nationwide farm loan waiver was the Agriculture and Rural Debt Relief Scheme (ARDRS), 1990. 
• It covered short-term loans and overdue instalments of term loans owed to public sector banks and Regional Rural Banks as of October 2, 1989.
• The scheme provided relief of up to ₹10,000 per farmer, without differentiating based on the size of landholdings.

Second Nationwide Waiver: ADWDRS, 2008

• The Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS), 2008 expanded the coverage to include scheduled commercial banks, RRBs, cooperative credit institutions, and local area banks.
• The scheme provided greater benefits to small and marginal farmers (with landholdings up to five acres) compared to larger farmers.

Fiscal Cost of the Schemes

• The 1990 waiver programme cost about ₹10,000 crore (around ₹50,600 crore at 2016–17 prices).
• The 2008 waiver cost about ₹52,500 crore (about ₹81,200 crore at 2016–17 prices), according to the RBI Internal Working Group report.

Expansion of Farm Loan Waivers by States

• Since 2014–15, around ten states have announced farm loan waiver schemes worth about ₹2.4 lakh crore, equivalent to 1.4% of India’s GDP (2016–17 prices), according to the RBI.

Major State Announcements

• Several states introduced large loan waiver programmes:
  • Madhya Pradesh: ₹36,500 crore (4.5% of GSDP)
  • Rajasthan: ₹18,000 crore (1.9% of GSDP)
  • Chhattisgarh: ₹6,100 crore (1.7% of GSDP)
• Similarly, Karnataka expanded its waiver scheme from ₹18,000 crore in 2017–18 to ₹44,000 crore (3.4% of GSDP) in 2018–19.

Impact on State Finances

• The fiscal impact of loan waivers is usually spread over three to five years, either through phased implementation or staggered payments to banks. 
• The burden varies across states, ranging from 0.1% to 1.8% of GSDP.

Effect on Agricultural Credit

• Loan waivers have been associated with a temporary slowdown in agricultural credit growth and loan disbursements, although lending tends to recover in the following years, according to the RBI.

RBI’s Position on Farm Loan Waivers

• The RBI has repeatedly discouraged farm loan waivers. It argues that waivers weaken credit discipline, as borrowers may delay repayments expecting future waivers. 
• This harms their credit history and ability to obtain new loans.
• The deterioration in credit culture is reflected in high agricultural NPAs, which stood at 8.44% as of March 31, 2019. 
  • States that announced waivers in 2017–18 and 2018–19 experienced rising NPA levels, indicating repayment stress.
• RBI reports suggest the possibility of moral hazard, where borrowers strategically default on loans anticipating government waivers.

Criticism from Former RBI Governors

• Raghuram Rajan argued that waivers benefit only a subset of farmers who have access to formal credit, often excluding the most vulnerable.
• Urjit Patel stated that waivers undermine credit discipline and discourage future borrowers from repaying loans.

Fiscal Impact on Governments

• Loan waivers also place significant pressure on government finances. 
• The RBI estimated that about 5 basis points of the fiscal slippage in revenue expenditure in 2017–18 were due to loan waivers.

Opportunity Cost for Agricultural Investment

• According to the RBI working group, funds spent on waivers reduce resources available for productive investments, such as agricultural infrastructure and long-term sector development.

Limited Impact of Loan Waivers

• According to an SBI research report, out of about 3.7 crore eligible farmers since 2014, only around 50% received the loan waiver benefits by March 2022, limiting the scheme’s effectiveness.
• The report notes that loan waivers have not significantly relieved farmers’ distress. 
• Instead, they have weakened credit discipline in some regions and made banks cautious about extending fresh agricultural loans.

Alternative Solutions for Farmers

• The SBI report recommends income support programmes as a better alternative. 
• With around ₹50,000 crore expenditure, such schemes could benefit more farmers and provide more stable financial support.
• The report emphasises that farm loan waivers are not a long-term solution. 
• Instead, policies should aim to increase farmers’ income through nationwide income support mechanisms.

Source: IE