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Reforming Loan Waivers Kerala Model

Reforming Loan Waivers Kerala Model


  • GS 3 || Economy || Agriculture || Agricultural Credit

 Why in News?

  • Union government is discussing a scheme to waive outstanding farm loans

NPA Status of the Nation

  • Duration of the Job: Between 2011 and 2015 NPAs in agriculture remained stable at around 4 to 5%
  • While agricultural growth averaged just 1.5% between 2011 and 2015.
  • Economic Slowdown: NPA in agriculture increased post 2009. The rise in agricultural NPAs between 2009 and 2011 was due to the “general economic slowdown”
  • The introduction of new norms in the “system-wide identification of NPAs”.
  • Rise After 2015:Agricultural NPAs began to rise again after 2015, real, policy-induced and a direct consequence of acute agrarian distress that spread across rural India after 2015.
  • Decrease in productivity, decrease in price discovery, lack of technology, lack of support infrastructure culminated into agrarian distress.
  • Demonetization of November 2016 worsened the agrarian distress by depleting cash out of the rural areas, crashing output prices and disrupting supply chains, which led to rise in NPA.

Predicaments with Loan Waivers

  • Reputational Always Consequences: once if the govt provides a loan waiver, farmers get in hope that they will able to reap out int the next season.
  • Loan waivers have “reputational consequences”; that is, they adversely affect the repayment discipline of farmers, leading to a rise in defaults in future.
  • Earlier debt waiver schemes have not led to increases in investment or productivity in agriculture.
  • Access to formal credit decline: farmers will have lesser credit because of loan waiver because he has already availed a loan waiver scheme.
  • So it wll become like a debt trap for the farmers.
  • Most of the small and marginal farmers are not proportionately collateral, and their resources are very less.
  • They are helpless to depend on informal sources, particularly moneylenders, for much of their credit needs.
  • As a result, the benefits of loan waivers collects disproportionately to large farmers while only marginally benefiting the small and marginal farmers.

More than Loan Waivers are in Need

  • They have only been two nationwide loan waiver program in India after Independence: in 1990 and 2008.
  • In September 2018, agricultural NPAs (about 8%) were far lower than in industry (about 21%).
  • Farmers are ver rigid in their repayment behavior.
  • Furthermore, agricultural NPAs were on a continuous decline between 2001 and 2008.
  • There is no evidence to argue that the 2008 waiver led to a rise in default rates among farmers.
  • The lowest of all NPAs after 2001 was recorded in March 2009 (2.1%), which was just after the implementation of the 2008 scheme.
  • The reason was the government’s cleaning up of the account books of banks.
  • Once this was complete, it was totally expected that NPAs would rise again to settle at a slightly higher level. This was exactly what had happened: agricultural NPAs rose and settled at about 5% by 2011.
  • For two reasons, the rise of agricultural NPAs, from 2% to 5%, is no evidence for indiscipline in farmer repayment behavior.

Significance of Loan Waivers:

  • Reduction of Debt burden- helps at time, for a while
  • Fresh Infusion of Credit

Kerala Model

  • Kerala model cover in its schemes that ensure universal coverage for small, marginal and medium-sized farmers
  • Also covers both the formal and informal sources of the farmers.
  • The Kerala Farmers’ Debt Relief Commission Act, 2006 is an excellent model in this regard.
  • It defines debt as “any sum borrowed by a farmer from the creditor”, with the creditor defined as “any person engaged in money lending, whether under a license or not”.
  • The commission’s mandate fair rate should be fixed, in the case of creditors other than institutional creditors, a fair rate of interest and an appropriate level of debt, to be payable.
  • Commission would have the right to reschedule or reduce any debt on a need-basis after a detailed hearing of both the parties.
  • Legislations such as Kerala’s are blueprints to design comprehensive, inclusive and less-leaky loan waiver schemes in other States.
  • Besides, to enhance productivity, reduce costs of cultivation by providing quality inputs at subsidized rates, provide remunerative prices needs to be taken.