NEW DELHI, FEBRUARY 29(with Vivek Deshpande): Defending the Rs 60,000-crore loan waiver over three years for farmers, Finance Minister P Chidambaram called it a “historic decision” that will give back money to the banks, clean up their books and help them lend more, stimulate the economy. He is yet to announce the fiscal provision that will provide this money to the banks to enable them to write off these loans.

There is only one instance in the recent past where a debt waiver was attempted — V P Singh waived all farm loans amounting to Rs 10,000 per farmer in 1990. That sounded the death knell for most cooperative banks in the country and the government was never able to make good the losses, Former Agriculture Minister Y K Alagh told The Indian Express today.

Alagh, as Member, Planning Commission, worked on long-term restructuring of farm loans in 1988 following two droughts. At that time, Rajiv Gandhi had put the money under the head of plan expenditure in the Budget. “The waiver announced today will have some immediate impact for some farmers (4 crore small and marginal with landholdings below five acres and 1 crore large farmers) but my fear is that it should not cripple the banks. The last time, banks were decimated as the government was not able to provide the funds.”

This time, however, Chidambaram said, he had “done his homework.”

“We have to pay for the liquidity to the banking system over a period of three years in which we would have recovered (the loans) to the extent being written off,” he said at a post-Budget briefing. Asked how banks would be compensated, he said: “Please credit me with some intelligence. We have done our homework. And when we do it, we will let you know how we do it.”

Seniors bankers feel the government might ask the Reserve Bank to issue SLR bonds to banks to clean-up their agri-NPAs. “We have received some indications that the RBI will issue Statutory Liquidity Ratio (SLR) bonds. However, no official communication has reached us as to who will take up the burden,” UCO Bank Chairman and Managing Director S K Goel told PTI.

The loan waiver will impact farmers whose loans were due as on December 31, 2007 and had defaulted. However, crop loans for the current kharif and abi seasons still need to be paid back this year. The pressure on the government to come up with drastic measures began with suicides in Vidarbha.

According to a door-to-door survey undertaken by the Maharashtra government in 2006, which probed all 17.64 lakh farmers from 8,351 villages in six suicide-ridden cotton districts, 4.34 lakh farmers (about 25%) were “acutely distressed,” 9.14 lakh (about 53%) were under “medium distress” while 3.7 lakh (about 22%) were without any distress. Of these, the number of small and marginal farmers was 15.63 lakh accounting for Rs 1,400 crore in outstanding loans. Clearly, the loan-waiver should give them immediate relief.

But a committee chaired by R Radhakrishna, director, Indira Gandhi Institute of Development Research, to examine agricultural indebtedness stopped short of suggesting waiver of loans. There are several reasons why:

• Only 51.3% of all farmers have access to institutional (bank) credit. Private moneylenders accounted for Rs 40,000-crore debt, according to NSSO figures.

• Debt from non-institutional sources, a major portion of which was from moneylenders, carried an interest rate greater than 30%. The committee pointed to an urgent need to relieve the farmers from private debt carrying high interest rate by transferring it to institutional agencies. This loan waiver doesn’t affect these farmers at all.

• The average indebtedness for a farmer with landholding upto 2 hectares is only Rs 8,870, according to the Radhakrishna report. Most of this is not under the head “crop loan” but under livestock, implements and even marriages. This waiver is only for crop loans.

• This step is likely to benefit poor farmers in richer, more developed areas of the country for the simple reason that it is in these areas that farmers have access to institutional credit. For instance, average outstanding debt per farmer household has been found to be higher in the state of Punjab followed by Kerala, Haryana,

Andhra Pradesh and Tamil Nadu — all relatively developed and better-banked states. “On the other hand, the incidence of indebtedness as well as outstanding debt per farmer was low in the states of central, eastern and north-eastern regions, pointing to the inadequacy of banking services,” points out the Radhakrishna report.

Among the main reasons responsible for farm distress is: increasing costs of production and lack of adequate support and market prices for produce, repeated crop failures; lack of irrigation facilities and lack of adequate crop insurance. For this reason, the committee had recommended a one-time measure of providing long-term loans by banks to farmers in order to help them repay their debts. It had even recommended setting up a moneylenders’ debt redemption fund to get over the most important problem that ails the farmers.