Banking & Economic Implications of Farm Loan Waivers

International Journal of Research, Volume VIII, Issue II, February/2019

11 Pages Posted: 10 Apr 2019

See all articles by Vijaya Kittu Manda

Vijaya Kittu Manda

Gandhi Institute of Technology and Management (GITAM), Institute of Management

Satya Yamijala

DXC Technologies

Date Written: February 16, 2019

Abstract

Governments of developing and agrarian-intensive economies such as India depend on banking channels to extend farming and agriculture credit. Agricultural credit is a priority sector lending in such countries and banks have to invariably have a part of their loan book pie allocated it`. Statistical trends show that some farmers who take these benefits are turning "smart" and intentionally delaying loan repayments with the expectation of a loan waiver, particularly few months ahead of the elections. They feel that their loan will get waived once the political party for which they voted comes to power. Overtime, it gets revealed that a very small number of farmers actually get the loan waiver benefit as promised. By then, the loan account balloons because of interest and penalties - too big for him to ever repay. The helpless farmer shows his inability to repay while the deficit budget-driven Governments could not reimburse. This puts banks into a difficult situation and have to mark the loans as Non-Performing Asset (NPA)s and to eventually write-offs.

This paper examines the various dimensions surrounding the agriculture loan waiver. The problem is examined from a bank-specific perspective. Loan waivers can turn into epidemic and spread to other segments causing a systemic risk to the economy. We study the economic implications with a specific focus on the impact on the banking system. The findings of this study will be of importance to policy makers, the banking regulator and banks.

Keywords: Farm loan, loan waiver, bank loans, priority sector lending, agricultural loan, agricultural credit

JEL Classification: G20, G28, Q14, Q18

Suggested Citation

Manda, Vijaya Kittu and Yamijala, Satya, Banking & Economic Implications of Farm Loan Waivers (February 16, 2019). International Journal of Research, Volume VIII, Issue II, February/2019, Available at SSRN: https://ssrn.com/abstract=3353616

Vijaya Kittu Manda (Contact Author)

Gandhi Institute of Technology and Management (GITAM), Institute of Management ( email )

Rushikonda
Gandhi Nagar
Visakhapatnam, 530045
India
+919849519188 (Phone)

Satya Yamijala

DXC Technologies ( email )

India

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