Farm loan write-off: Is it sensible or possible?

The world has gone much ahead. Yet honorable Indian politicians stay within a box of old thinking. They need a slogan to easily win all elections though they don’t bother economic consequences of some of their actions and promises. The promise of farmers’ loan waiver is one of the best examples. It is of course not sensible, though may be possible with the pain of labour for senseless results, argues our research team.     

It is a bad economics. It is a dirty politics by any standard. The combination of dirty politics and bad economics renders no less than a serious economic disaster.

Loans given by lenders are not lenders’ money or out of public exchequer. That is the money of depositors, who include people of all sections – from poor farm labourers to super rich businessmen. Banks are supposed to return them when they demand their money. On the other side, borrowers are given a fixed time for return of their liabilities unlike their lenders’ liabilities which are to be paid upon their depositors’ demands. This is how the banking business works. No lender can forget or write off their assets – the loans, at any point of time. The write-off in banking parlance does not have meaning of “forget the loans”. After taking loan no borrowers can enjoy the money with an expectation that our favorite politicians would come day to set them free from the liabilities. This doesn’t mean political calls deserve to be rebuked. But let us understand some facts. 

When atleast some of our politicians boast of having fairly good knowledge of economics, we earnestly need them to advise their colleagues about the unworkable and counter-productive economic measures. But they are sadly silent about their fellow politicians’ call for senseless loan waiver. That is another disaster. 

It is not so simple to waive off any bank loan – be it of a size of rupee or a trillion. At the most, what a lender can rethink of is to work out a relief measure by pruning interest rate by some basis points or forgetting the late payment penalties or amnesty for repayment of principle amount for some times. Beyond this anything is impossible for them. The promise of waiving off all loans is, thus, a disaster for many reasons.

Close to the election time, since the day the politicians promise loan waiver, farmers stop repayment. They begin to show a bad habit. The farmers who used to make repayment religiously on time until the day suddenly begin to default even if they have enough money at their disposal to repay. These farmers do not know that their single default makes their individual credit rating poor. That makes them ineligible for next loan and lands them in difficulties by the lenders’ denial on the ground of their earlier default. Thus, the action changes the debtors’ character. That is economically sinful.

On the other side, thousands of branch level managers come under pressure to handle the situation. 

By a loan waiver, if our politicians are aiming a better living for our farmers who work for making our country food abundant, then they must rethink seriously. Loan waiver will prove to be counter-productive and an anti-farmer gesture. The write-off makes the farmers life-time defaulters, thereby ineligible for all borrowing henceforth. The politicians cannot prevent this consequence. 

Instead of loan waiver, the responsible politicians and lawmakers must think of some other alternate measures, which can strengthen the lending system by which the debt-ridden farmers gain better credit worthiness. That will make them bargain hard with lenders for better rates. It is natural that every lender will run after quality borrowers with their products. Farmers’ access to bank loan also will be better. 

The loan waiver requires repayment of equal amount by those who have promised it – essentially the government-  on behalf of the borrowers. That is obviously an involvement of huge sum, most of the States cannot afford. If the same size of fund is deployed for other welfare or promotional measures, we can improve the socio-economic conditions of our farmers. With the fund earmarked for the promised loan waiver, the government can extend a special interest subsidy for farmers on condition of disciplined repayment. That will encourage them to repay their loans on time. Instead of directly waving off the loans, the same fund can be used for cash transfer to those who had to repay huge loans, which they paid on time. That can trigger a farm loan boom also.

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