Banking & Economic Implications of Farm Loan Waivers

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