Credit crunch: Bank lending to Maharashtra’s farmers has dipped (and loan waivers are the reason)

In the months after Maharashtra government announced a farm loan waiver in June, fresh lending by banks in the state has reduced drastically. The banks have fallen well short of achieving their targets for this kharif lending season, according to data provided by the State Level Bankers’ Committee, a coordination forum for banking development.

The kharif lending season is from April 1 to September 30. As of August 31, banks had disbursed only Rs 16,767 crore worth of loans – about 41% of their target of Rs 40,547 crore. In the same period in 2016, they had disbursed Rs 30,210 crore, or 80% of their target of Rs 37,677 crore. Data for September and October is still being collated.

The main reason for the drop in lending is that farmers are waiting for debt relief concessions, said Pramod Karnad, who was until September managing director of the Maharashtra State Cooperative Bank, which oversees the state’s cooperative banks.

Karnad said most banks, particularly cooperative banks, usually achieve their seasonal credit disbursal targets by September-end, with many even exceeding the targets. But this year, he added, lending was hampered for two reasons.

In June, after the state government waived all farm loans overdue as of July 2016, farmers due to repay their loans this year began to default in the hope of a similar waiver for 2017. This reduced the number of people eligible to apply for fresh loans.

An official with the Bank of Maharashtra, the convenor bank of the State Level Bankers’ Committee, confirmed this. “This year, despite better rainfall, the crop loan disbursement, particularly during kharif season, was low, mainly because of the loan waiver scheme of the government,” said the official, who asked not to be identified. He added that even farmers who had been regularly repaying loans stopped payments when they heard of the waiver, making banks averse to giving them more credit.

Another reason is that the farmers who are eligible for the waiver announced in June cannot take fresh credit until the bad loans are cleared off their books. This process began only in October. The state government has so far released Rs 4,000 crore of an estimated Rs 34,000 crore to 8.4 lakh farmers under the waiver scheme.

Bad timing

What made the disruption in agricultural credit flow more acute, the Bank of Maharashtra official said, was the timing of the loan waiver – peak kharif, the state’s main agricultural season. The government agreed to waive farm loans in June, after farmers went on strike to demand, among other things, debt relief and higher market compensation for their produce. The terms of the waiver were released in late July and the deadline for applications fixed in September. “Discussion for the scheme started in the first quarter and the scheme came into play in the second quarter,” the official said. “That is the peak period for [loan disbursement].”

In 2008, the central government waived farm loans overdue as of December 2007 and still unpaid as of February across India. The announcement came in February and as farmers’ debts began to be cleared, freeing a large number to apply for fresh loans, there was a spike in credit disbursement for the kharif season in 2009.

“All this debt relief is to make farmers eligible for fresh agricultural loans,” the official said. He thus anticipates loan disbursal to increase in the next lending cycle.

Huge shortfall

The Reserve Bank of India has made it compulsory for all public and private banks to channel a fixed percentage of their lending towards priority sectors that might ordinarily find it difficult to access credit. Agriculture is entitled to 18% of a bank’s credit outlay. This includes loans for crops, infrastructure and ancillary activities.

Each bank issues annual credit plans that include their targets for crop loans. They are required to submit this data periodically to the State Level Bankers’ Committee, which puts it in the public domain.

As per data provided by the committee, Marathwada in central Maharashtra saw the steepest drop in crop loan disbursement, with banks there reaching just 26% of their lending target. In western Maharashtra, which saw the most heated protests for debt relief, banks achieved 54% of their target by the end of August.

In the poorer eastern region of Vidarbha, the farmer leader Kishor Tiwari said banks were not willing to lend to farmers even before the waiver. “Politicians engineered the loan waiver to break the credit cycle and so profit by it,” he said, implying only the rich farmers of western Maharashtra would benefit.

Tiwari added that farmers whose loans were waived this year are waiting for the next kharif season before applying for fresh loans, instead of applying for loans in the rabi season.

Cooperative banks have come closest to achieving their credit targets despite their liquidity being affected by demonetisation (cooperative banks were not permitted to exchange old currency notes until August 8).

Karnad said their deeper rural networks enabled cooperative banks to lend more than other banks. It was not the case, he added, that other banks were unwilling to meet their targets.

Punjab parallel

Punjab too saw a drop in credit recovery and disbursement of crop loans after the state government announced it would waive loans. The terms of the waiver were eventually put out in September.

In its agenda for a meeting held on August 3, Punjab’s State Level Bankers’ Committee, led by the Bank of Baroda, mentions that just the promise of a waiver in the Assembly meant that farmers began to default. “As a result the farmers in the state of Punjab have stopped making repayment of their crop loans and the recovery scenario is being adversely affected,” a record of the meeting notes. “Even other farmers are not making repayments in the hope of Debt waiver.”

As recovery dropped, credit disbursement too fell, from 103% of the target in June 2016 to 82% in June 2017, the latest period for which data is available.