Farm loan waiver

Also called: Debt waiver, Loan waiver · Topic: Rural Credit, Microfinance and Financial Inclusion · NCERT: Class 11, Ch 5 "Rural Development"

Meaning

A farm loan waiver is when the government cancels all or part of the loans that farmers have not repaid, usually after a drought or other distress, and then pays the banks the waived amount from its own budget. It matters because it gives farmers quick relief. But it also costs the government a lot of money. It can also weaken credit discipline, meaning the habit of repaying loans on time. This is why the RBI and many economists warn against waivers.

Explanation

How a waiver works

• Who gains: the farmer's unpaid loan is cancelled, so their loan account is clean again.
• Who pays: the government (Centre or state) pays the bank the waived amount from its budget. The bank does not bear the loss.
• What it covers: only loans from formal lenders, such as commercial banks, RRBs (Regional Rural Banks) and cooperatives. Money owed to moneylenders (informal lenders who charge very high interest) is not touched.
• Full waiver vs partial relief:
• Full waiver: the whole unpaid loan is cancelled.
• Debt relief / one-time settlement (OTS): the farmer repays part of the loan and the government pays the rest.
• Worked example (ADWDRS 2008 rule): an "other farmer" owes ₹2,00,000. If they repay ₹1,50,000 (75%), the government pays the bank ₹50,000 (25%). A marginal farmer with the same debt gets all ₹2,00,000 waived.

Why farmers default: the root of the waiver question

• Loan default means failing to repay a loan (the interest, the principal, or both) on time. NCERT calls farm default "chronically high" (high year after year).
• Measuring default:
• Recovery rate = (Amount repaid ÷ Amount due) × 100
• Default rate = 100 − Recovery rate

• Worked example: a cooperative society has ₹10 crore due and gets back ₹6 crore. Recovery = 60%, default = 40%. Next season it has only ₹6 crore (plus fresh deposits) to lend. The credit cycle shrinks.

• Two kinds of default:

• Wilful default: the farmer can repay but chooses not to, for example because a waiver is expected.

• Distress default: the farmer cannot repay because of crop failure (drought, flood, pests), low prices at harvest, or no insurance.

• Why this matters for policy: wilful default calls for stricter recovery. Distress default calls for insurance, better prices and loan restructuring. A blanket waiver treats both kinds the same way.

Why waivers are debated

• Moral hazard (people take less care when they expect someone else to cover the cost):
• Farmers who can repay wait for the next waiver.
• Repayment discipline falls.

• Banks become cautious about lending to farmers, and farmers go back to moneylenders.

• Crowding out of capital spending:

• The waiver is paid from the state budget.
• The FRBM law (Fiscal Responsibility and Budget Management law) limits how much a state can borrow.
• So the state cuts capital expenditure (spending on lasting assets like irrigation, roads and cold storage).

• Result: less long-term investment in farming.

• Arguments for waivers: immediate relief to distressed farmers, support for rural consumption, and a cleared balance sheet that lets farmers borrow again.

In India

• Central waivers:
• ARDRS, 1990 (Agricultural and Rural Debt Relief Scheme) was the first central scheme.
• ADWDRS, 2008 (Agricultural Debt Waiver and Debt Relief Scheme). NCERT puts its cost at about ₹52,000 crore.
  • Loans covered: direct farm loans from scheduled commercial banks, RRBs, cooperative credit institutions and local area banks. The loans had to be given between 1 April 1997 and 31 March 2007, be overdue on 31 Dec 2007, and still be unpaid on 29 Feb 2008 [3].
  • Small and marginal farmers got a 100% waiver. "Other farmers" got 25% debt relief if they paid the other 75% [3].
  • Final benefit: 3.73 crore farmers received ₹52,259.86 crore [3].

• CAG audit (2013): the CAG (Comptroller and Auditor General, India's top government auditor) found wrong inclusions (ineligible farmers got benefits) and wrong exclusions (eligible farmers were left out). It also found little checking of whether the scheme met its main aim: getting fresh loans to farmers [4].

• State waivers:

• There was a wave in 2017-19 in UP, Maharashtra, Punjab, Karnataka, MP, Rajasthan and Chhattisgarh.
• 10 states declared waivers worth ₹2,63,260 crore. About ₹1.85 lakh crore of this came in 2017-18 and 2018-19 alone [5].
• States pay these waivers over several years to keep their fiscal deficit (how much more the government spends than it earns, which it must borrow) low. As of 2019-20, ₹1,08,843 crore was still to be paid [5].

• The Union Agriculture Ministry noted that waivers reward defaulters and discourage farmers who can pay, or have paid on time [5].

• RBI Internal Working Group on Agricultural Credit (report released 13 September 2019):

• Since 2014-15, 10 states announced waivers worth ₹2.4 lakh crore (1.4% of 2016-17 GDP), mostly near elections [2].
• It found that waivers do not fix the root causes of distress, destroy credit culture and squeeze fiscal space (the room in the budget) for productive farm investment [2].

• Recommendation: avoid waivers, and have the Centre and states review farm policies and input subsidies (subsidies on fertiliser, power and so on) [2].

• Distress data: in 2022, 11,290 persons in the farming sector died by suicide (5,207 farmers/cultivators and 6,083 agricultural labourers). This was 6.6% of all 1,70,924 suicides, according to NCRB's ADSI report [6].

Don't confuse with

• Loan write-off: a write-off is a bank's accounting step. The bank removes a bad loan from its books, but the borrower still owes the money. In a waiver, the borrower's debt is cancelled and the government pays the bank.
• Loan restructuring: the bank gives more time or reschedules repayments, for example after a calamity is declared. The debt is not cancelled.
• Debt relief (OTS): this is partial relief that depends on the farmer paying something. In ADWDRS 2008, "other farmers" got 25% only after repaying 75%. A full waiver needs no repayment.
• Income support (PM-KISAN): a direct cash transfer to all eligible farmers. It does not depend on having a loan and does not reward default.

Prelims Hooks

• The first central farm debt relief scheme was ARDRS, 1990, not ADWDRS 2008. This is a common trap.
• ADWDRS 2008: 100% waiver for small and marginal farmers. "Other farmers" got 25% relief if they paid the other 75%. It covered loans given between 1997 and 2007. In total, 3.73 crore farmers got ₹52,259.86 crore [3].
• The CAG (2013) audited ADWDRS and found wrong inclusions and wrong exclusions [4].
• The RBI Internal Working Group on Agricultural Credit (2019) said waivers should be avoided. It counted ₹2.4 lakh crore of state waivers since 2014-15, equal to 1.4% of 2016-17 GDP [2].
• Waivers cover only formal loans. Debt owed to moneylenders is left out, so the poorest borrowers often miss out.
• Moral hazard (expecting a bailout makes people behave worse) is the classic argument against loan waivers.

Mains Points

• Waiver or root-cause fix (GS-III): most farm default is distress default caused by risk that nobody manages (weather, prices, no insurance). So the lasting fix is crop insurance (PMFBY), better price realisation, calamity restructuring and income support (PM-KISAN), not blanket waivers. The IWG 2019 call to review input subsidies fits the "way forward" part of an answer [2].
• Fiscal trade-off (GS-II/III): state waivers of ₹2,63,260 crore are paid over several years [5]. Under FRBM borrowing limits, they crowd out capital spending on irrigation, storage and research. This hurts future farm income more than the waiver helps now. Waivers announced mostly near elections [2] point to competitive populism.
• Credit culture and financial inclusion: repeated waivers weaken repayment discipline and make banks slower to lend to farmers. Farmers are then pushed back to moneylenders. This works against what PMJDY and priority sector lending try to achieve.

Related concepts

• Loan default

Read more

• Rural banking appraised: default, distress and farm loan waivers