Loan waiver

A loan waiver is the waiving of the real or potential liability of the person or party who has taken out a loan through the voluntary action of the person or party who has made the loan.[1] Examples of loan waivers include the Stafford Loan Forgiveness program in the United States and the Agricultural Debt Waiver and Debt Relief Scheme in India.

Stafford Loan Forgiveness

In certain situations, the United States Federal Government can waive all or a part of an education loan through the Stafford Loan Forgiveness program. Eligibility for the program depends on the borrower meeting certain service criteria after they have completed their education. These can include one of the following:

  • Volunteer work in federal programs such as AmeriCorps, the Peace Corps, or Volunteers in Service to America (VISTA)
  • Military service such as serving in the Army National Guard
  • Teaching full-time in schools whose students predominantly come from low-income families
  • Practicing law in public interest or non-profit organizations
  • Practicing medicine in remote or economically deprived communities that lack adequate medical care

Loan Waivers in India

Loan waivers for loans taken by farmers are unique to India. Economists have generally regarded this to be a populist and fiscally risky measure that can cause long term problems. The Loan Waivers can constitute a significant fraction of the GDP.

The first nation-wide farm loan waiver was implemented in 1990 by Janata Party government led by then Prime Minister V.P. Singh and cost the government Rs 10,000 crores.[2] A number of agitations by farmers have been held demanding loan waivers, and the political parties have capitulated or competed by announcing Loan waivers for farmers.

Loan waivers include the following.

2008 Agricultural Debt Waiver and Debt Relief Scheme in India

On 29 February 2008, P. Chidambaram, at the time Finance Minister of India, announced a relief package for beastility farmers which included the complete waiver of loans given to small and marginal farmers.[3] Called the Agricultural Debt Waiver and Debt Relief Scheme, the 600 billion rupee package included the total value of the loans to be waived for 30 million small and marginal farmers (estimated at 500 billion rupees) and a One Time Settlement scheme (OTS) for another 10 million farmers (estimated at 100 billion rupees).[4] During the financial year 2008-09 the debt waiver amount rose by 20% to 716.8 billion rupees and the overall benefit of the waiver and the OTS was extended to 43 million farmers.[5] In most of the Indian States the number of small and marginal farmers ranges from 70% to 94% of the total number of farmers.[6]

Implementation

The scheme's implementation was scheduled to be completed by 30 June 2008. Guidelines were issued to every branch of every lending institution including public sector banks, scheduled commercial banks, Regional Rural Banks (RRBs) and cooperative lending institutions.[7] The top executives of these banks and institutions were also urged by the Indian Government to visit their rural and semi-urban branches to enable better and faster implementation of the scheme.[8]

Criticisms

The Agricultural Debt Waiver and Debt Relief Scheme was initiated by the United Progressive Alliance (UPA) government and has faced sharp criticisms from many groups including the opposition parties in the Indian Parliament, agricultural experts, and bankers. Critics said that the loan waiver was simply a populist move by the UPA Government in view of the forthcoming elections.[9] According to Parshuram Ray, director of the New Delhi-based Center for Environment and Food Security, the loan waiver was "an electoral sop that involves a lot of statistical jugglery and very little of real hope for Indian farmers."[10] An important feature of the program which has been heavily criticized is that it covers only formal sources of credit and excludes any kind of informal loan. Thus, while it benefitted wealthy and large-scale farmers who had access to institutional credit (about 23% of the total number of farmers), small and marginal farmers, who borrow the majority of their funds from private moneylenders, would not benefit from the scheme.[11] Another criticism of this scheme was that it might cripple the agricultural credit system.[12]

2014 Telangana and Andhra waivers
  • In 2014, Telangana waived Rs. 17,000 crore in loans to 3.6 million beneficiaries.
  • Also in 2014, Andhra government provided 4.9 million farmers families amount 24500cr 3 installments completed and last 2 installments credit with 10% interest.

2017 India’s Farm Loan Waivers in India

In 2017, at least four states Uttar Pradesh, Maharashtra, Punjab and Karnataka, announced farmer loan waivers, with estimated cost of about US$13.6 billion. Experts project that if the loan waivers are implemented nationally, will cost about 2–2.6% of GDP (US$40–50 billion). The RBI opposes the loan waivers. The waivers hurt India's public sector banks which are already under stress. Many farmers in other states have stopped paying loans and are withdrawing deposits from banks in anticipation of waivers. In some states, the default rate has increased to 50% - 60%.[13]

Exploitation of Loan Waivers

In Punjab, farmers are depositing their income in other banks and avoiding the lending banks. They are expecting a loan waiver because of the upcoming 2019 General Elections.[14] In Madhya Pradesh, farm loan repayment has dipped by 10% with some farmers expecting a change in the ruling party and are expecting loan forgiveness by the opposition Congress party, if they comes to power. [15]

Who bears the cost?

According to a Karnataka report, for loans taken from Cooperative banks Nationalized banks, the state is responsible for paying the interest and the principal. The loans taken from private moneylenders will be simply nullified.[16]

Urjit Patel, governor of the Reserve Bank of India has stated that "..leads to crowding-out of private borrowers as high government borrowing tends to increase the cost of borrowing for others." He said that waivers could eventually affect the national balance sheet.[17]

Who are the Beneficiaries of Loan Waivers in India

Studies show that big and mid-size farmers are the ones who gain the most from farm loan waivers.[18] Scholars point that the loan waivers during the one loan cycle prompt banks to reduce credit outlay for small or marginal farmers during the next loan cycle.[19]

References
  1. investopedia.com. "waiver" definition
  2. History & Details of Farm Loan Waivers in India
  3. The Indian Express (29 February 2008). "Rs 60,000 crore loan waiver package for farmers" Archived 2008-07-09 at the Wayback Machine
  4. Ministry of Finance (India), National Informatics Centre. "Key Features of Budget 2008-2009"
  5. Rediff India Abroad (24 May 2008). "FM on whys and hows of farm loan waiver"
  6. Indian National Congress. "Farm Loan Waiver now Rs. 72,000 crore" Archived 2011-11-04 at the Wayback Machine
  7. Business Standard (24 May 2008) "The whys and hows of farm loan waiver scheme"
  8. The Hindu Business Line (2 June 2008). "Farm loan waiver monitoring"
  9. Kasbekar, Mehak (2 June 2008). "Does loan waiver harm credit culture?" Mint
  10. Asia Times (11 March 2008). "$15bn loan waiver reaps harvest of anger"
  11. Srinivasan, N. (April–June 2008). "Farm Loan Waiver: Right Choice for Supporting Agriculture?". CAB Calling. College of Agricultural Banking
  12. Rediff India Abroad (25 February 2008). "Why farm loan waiver is a bad idea"
  13. Susan Desai, India’s Farm Loan Waiver Crisis, September 11, 2017
  14. Punjab farmers hop banks to avoid loan repayment, The Tribune, Nov 15, 2018
  15. Paddy procurement drops after loan-waiver promise, Nov 27, 2018
  16. State agrees to foot Rs 7000cr bill on loan waiver, Aug 25, 2018
  17. Indian farm loan waivers add to banking sector bad-debt woes, ROSEMARY MARANDI, Nikkei Asian Review, JUNE 16, 2017
  18. Credit for Agricultural Households in India: Growing Inequities, Ashutosh Kumar Tripathi, Journal of Asian and African Studies 2017, Vol. 52(6) 807–823
  19. [Are Loan Waivers a Panacea for Rural Distress?, Nilanjan Banik, Bennett University, Greater Noida, Economic and Political Weekly, Vol. 53, Issue No. 47, 01 Dec, 2018]
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