Farm Loan Waivers In India: Impact on Credit Culture and State Finances

Recently, the Maharashtra government announced a Rs 35,000 crore waiver scheme, potentially impacting the state’s credit culture and finances.

Background on Farm Loan Waiver

• Purpose of Agricultural Borrowing: Farmers take institutional loans to purchase seeds, fertilisers, and farm equipment required for crop cultivation.
• High Risk in Agriculture: Farming faces natural risks (droughts, floods) and market risks (decline in crop prices), which can reduce farmers’ repayment capacity.
• Trigger for Waiver: When crop failure or a price crash leads to severe financial distress and an inability to repay loans.
• Government Intervention: The government repays the outstanding institutional loan to banks on behalf of farmers.
• Meaning of Farm Loan Waiver: It is a policy where the state absorbs the farmer’s debt liability, relieving them from repayment obligations.

Maharashtra’s ₹35,000 Crore Farm Loan Waiver Scheme

• Total Allocation: ₹35,000 crore scheme structured into two components to address farm distress and encourage credit discipline.
• Support for Loan Defaulters (₹20,000 crore): Farmers unable to repay loans due to agricultural distress receive a complete debt waiver.
  • Focuses on farmers experiencing acute, documented agricultural distress.
• Incentives for Honest Repayers (₹15,000 crore): Farmers who repaid loans on time receive an incentive of ₹50,000 per farmer.
  • The scheme attempts to reward timely repayment, a feature rarely included in earlier farm loan waiver programmes.

History of National Farm Loan Waivers in India

• ARDRS, 1990 (Agricultural & Rural Debt Relief Scheme): Launched on 15 May 1990, covering loan overdues up to 2 October 1989.
  • Coverage: Applied to Public Sector Banks (PSBs) and Regional Rural Banks (RRBs) with a maximum waiver of ₹10,000 per farmer, without land-size distinction.
  • Fiscal Scale: Inflation-adjusted cost today estimated at ₹50,600 crore.
• ADWDRS, 2008 (Agricultural Debt Waiver and Debt Relief Scheme): A broader programme covering commercial banks and cooperative banks.
  • Target Group: Focused mainly on small and marginal farmers owning up to 5 acres of land.
  • Fiscal Scale: Inflation-adjusted cost today estimated at ₹81,200 crore.
• Electoral Context: Major farm loan waivers in India have frequently coincided with electoral cycles, such as the 1990 waiver before the 1991 general elections and the 2008 waiver ahead of the 2009 elections.
• SBI Research Findings:
  • Limited coverage: Between 2014 and March 2022, only about 50% of eligible farmers actually received waiver benefits.
  • Implementation gaps: A large share of intended beneficiaries remained excluded due to administrative delays and inefficiencies.
  • Overall assessment: Farm loan waivers act as a temporary relief measure rather than a structural solution to agrarian distress.

Post-2014- Rise of State-Level Farm Loan Waivers

• Shift to States: After 2014, the Union government largely discontinued nationwide farm loan waivers, while several states launched their own schemes.
• Participating States: Andhra Pradesh, Telangana, Uttar Pradesh, Punjab, Rajasthan, Madhya Pradesh, and Chhattisgarh introduced waiver programmes.
• Scale of Waivers: State-level waivers together amount to about ₹2.4 lakh crore, exceeding the cumulative scale of earlier national schemes.
• RBI Working Group Finding: Around 8 out of 10 state waiver announcements occurred within 90 days of election results.
  • The pattern suggests that farm loan waivers increasingly function as electoral instruments rather than long-term agricultural policy tools.

Fiscal Impact of Farm Loan Waivers on State Budgets

• Meaning of GSDP: Gross State Domestic Product represents the total economic output of a state.
• Extended Fiscal Burden: Waiver liabilities are usually paid to banks over 3–5 years, creating sustained fiscal pressure on state finances.
• State-wise Cost as Percentage of GSDP:
  • Andhra Pradesh and Tamil Nadu: Around 0.1% of GSDP.
  • Chhattisgarh: Around 1.8% of GSDP, reflecting moderate fiscal stress.
  • Madhya Pradesh: Up to 4.5% of GSDP, representing one of the most severe fiscal burdens among states.
• Overall Budgetary Effects: 
  • Fiscal Slippage: Farm loan waivers contribute to fiscal slippage, with about a 13-basis-point increase in revenue expenditure, of which 5 basis points are due to waivers alone.
  • Crowding-out effect: Increased waiver spending can reduce funds available for irrigation, rural roads, and productive agricultural investment.

Moral Hazard in Farm Loan Waivers

• Moral Hazard in Credit Behaviour: When borrowers expect future waivers, some may strategically delay or stop loan repayment, anticipating government intervention.
• Erosion of Credit Discipline: If loan defaulters receive waivers while regular payers receive no comparable benefit, trust in responsible repayment behaviour declines.
• Impact on Rural Credit Culture: Over time, strategic defaults weaken the credit culture in rural banking systems.

Impact of Farm Loan Waivers on Non-Performing Assets (NPAs)

• Rising Agricultural NPAs: Agricultural NPAs rose to about 8.44% by March 2019, showing a correlation with repeated waiver cycles.
• Higher NPAs in Waiver States: States announcing loan waivers often record higher NPAs in subsequent years.
• Reduced Bank Lending: Increased defaults make banks more cautious about new lending, limiting access to credit for new or genuine borrowers.

Recommended Alternative- PM-KISAN Model

• Direct income transfer: Redirect waiver funds directly to farmers’ bank accounts through DBT, reducing intermediaries and delays.
  • The PM-KISAN model provides universal, transparent, and direct transfers that can operate effectively at scale.
  • Farmers receive income support without undermining repayment culture in rural credit systems.
• Long-term approach: Policy focus should shift toward enhancing farm profitability and productivity rather than recurring debt-relief cycles.

Check Out UPSC CSE Books

Visit PW Store

Conclusion

Farm loan waivers offer only short-term relief. Addressing agrarian distress requires raising farmers’ incomes through nationwide income support and structural agricultural reforms.

DOWNLOAD PDF