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Expecting waivers, farmers stop paying back bank loans?

The write-off of farm loans in Uttar Pradesh and Maharashtra seems to be encouraging farmers in other states to stop paying back their farm loans to make sure that they will get the benefits of any farm loan waiver program in their state. This has led to a sharp increase in farm loan defaults for Indian banks.

Experts have been warning that farm loan waivers — amounting to Rs 36,000 cr in Uttar Pradesh and Rs 30,000 cr in Maharashtra — would create a moral hazard — a condition that where cheating is encouraged and ‘good guys’ finish last.

In other words, they warned that waivers would encourage farmers to take more and more loans and not pay them back even when they can, expecting that their liabilities will be waived off.

Increasing default rates also make it waivers more likely. Typically, governments will waive off loans only if and when default rates are high, and not if most loans are being repaid on time.

Going by numbers from the Reserve Bank of India, some of the expert predictions are coming true.

The total amount of non-performing loans — or loans on which the farmer has stopped making repayments — has risen sharply in recent years.

At the end of March 2015, the total amount of agricultural loans in default with scheduled commercial banks was Rs 37,853 cr.

This number sharply to 51,964 cr by the next year.

By March this year, the number has risen to 62,307 cr. What’s more, these numbers do not include write-offs. In other words, these are loans in default are not those covered by the write-off program so far.

For example, a total of Rs 7,548 cr worth of farm loans were waived off in the year ending in March 2017.

If these had not been written off, the total non-performing agricultural loans would have risen to 69,855 cr — a doubling in just two years.

This could be due to one of two reasons: Either the repayment ability of Indian farmers has drastically reduced between 2015 and 2017, or farmers have stopped paying back the loan to make sure that they get the benefit of any farm loan waiver.

Any amount paid to a loan that is covered by a waiver scheme is a ‘loss’ as it is not reimbursed to the farmer. Instead, if the farmer stops repaying the loan, he or she stands to benefit to that extent when the waiver is announced.

Farmers in states like Punjab, Madhya Pradesh, Gujarat and Haryana have also demanded waivers in recent months.

In Madhya Pradesh, for example, a total of Rs 56,000 cr of farm loans are demanded to be written off, and another Rs 56,000 cr in Haryana. In Punjab, home to India’s richest farmers, the total demand for waivers is to the extent of Rs 36,600 cr.

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