Farm loan waivers


  • According to reports, the Central government is discussing a scheme to waive outstanding farm loans in the aftermath of widespread farmers’ protests between March and December 2018 .
  • Till now, at least 11 States have announced schemes to waive outstanding farm loans: Madhya Pradesh, Uttar Pradesh, Karnataka, Tamil Nadu, Maharashtra, Chhattisgarh, Punjab, Andhra Pradesh, Telangana, Assam and Rajasthan.
  • The pitch for waivers among States has added to the pressure on the Central government for a nationwide farm loan waiver.


  • Economists and bankers are sharply divided on whether farm loan waivers are desirable.
  • One section of economists and hard-nosed bankers argues that loan waivers represent poor policy for a variety of reasons.
  • First, loan waivers have “reputational consequences”; that is, they adversely affect the repayment discipline of farmers, leading to a rise in defaults in future.
  • Second, earlier debt waiver schemes have not led to increases in investment or productivity in agriculture.
  • Third, after the implementation of debt waiver schemes, a farmer’s access to formal sector lenders declines, leading to a rise in his dependence on informal sector lenders;
  • The waivers lead to the shrinkage of a farmer’s future access to formal sector credit.

Critically assessment

  • To begin with, there have only been two nationwide loan waiver programmes in India after Independence: in 1990 and 2008.
  • The accompanying image gives data on agricultural non-performing assets (NPAs) of banks before and after the 2008 waiver, and throws up two conclusions.
  • First, farmers are most disciplined in their repayment behaviour. In September 2018, agricultural NPAs (about 8%) were far lower than in industry (about 21%).
  • The furthermore, agricultural NPAs were on a continuous decline between 2001 and 2008.
  • Second, 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.

Rising NPAs

  • For two reasons, the rise of agricultural NPAs, from 2% to 5%, is no evidence for indiscipline in farmer repayment behaviour.
  • NPAs in agriculture remained stable at around 4 to 5% between 2011 and 2015. This was despite the fact that agricultural growth averaged just 1.5% between 2011 and 2015.
  • D. Subbarao, the former Reserve Bank of India Governor, had pointed out in a 2012 speech that the rise in agricultural NPAs between 2009 and 2011 was due to the “general economic slowdown” after 2009 and the introduction of new norms in the “system-wide identification of NPAs”.

Way forward

  • While loan waiver schemes are like a band-aid on a wound, it is the larger agrarian distress that demands urgent policy attention.
  • Unless there are steps ‘to raise productivity, reduce costs of cultivation by providing quality inputs at subsidised rates, provide remunerative prices following the recommendations of the Swaminathan Commission.
  • It ensure assured procurement of output, expand access to institutional credit, enhance public investment for infrastructural development, institute effective crop insurance systems and establish affordable scientific storage facilities and agro-processing industries for value addition’,
  • The farmers will continue to be bonded to low income equilibrium and repeated debt traps.

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