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Implications of the Loan Waiver for Rural Credit Institutions

The loan waiver will lighten the debt burden of the farmers. But in the long term this will adversely affect the rural credit institutions that extend loans to farmers. A discussion of the likely fallout.

COMMENTARYjune 14, 2008 EPW Economic & Political Weekly14institutions,took greater interest in the newly emerging self-help groups in rural areas. Finding that these bodies, coming up largely on their own or on some non-government organisations’ initia-tive, were successfully collecting small savings on a regular basis from their members and providing loans to the needy amongst them from out of such savings,NABARD decided to increase the supply of rural credit by supporting such institutions by providing them with massive cheap loans.The Planning Commission, finding that the rural cooperative credit institu-tions, which had over the preceding five decades helped agriculture with large-scale loans to finance production as well as capital investment, were not perform-ing well, set up a committee to recom-mend steps to revive such institutions. That committee (the Vaidyanathan Com-mittee) came to the conclusion that the only way to revive rural cooperative credit institutions would be to free them from government share capital and all types of state financial help and loans as well as from the government staff who run them, thereby making them, in effect, completely member-driven insti-tutions. In order to free the cooperative institutions of the financial involvement of the state in them, the committee suggested a financial provision of about Rs 14,000 crore to repay the state gov-ernments their financial dues. There was also an obligatory recommendation to amend the cooperative laws in the states along the lines of the model draft law prepared by the Brahma Prakash Com-mittee of the Planning Commission. The prime minister and the finance minister accepted these recommendations of the committee.But, from the provisions in the memo-randum of understanding signed by the union ministry of finance, NABARD and the state governments, specifying the steps to be taken by the state in order for the union government to release the estimated money, it appears that under the new arrangement, the state govern-ment can subscribe up to 20 per cent of the share capital of the cooperative insti-tution. If the existing cooperative law cannot be amended along the lines recom-mended, then a new parallel law along the suggested line should be passed to enable intending institutions to register under it. If this is done, the state can receive money, as per the recommendation of the Vaidyanathan Committee, to revive the existing cooperative credit institutions. From this, the extent to which the recom-mendations of the committee to revive the cooperatve credit institutions have been carried out by these memoranda of understanding would become clear.State-owned as well as private commer-cial banks are reluctant to extend credit to the large number of small farmers in the country as the banks find that the cost of extending credit to small farmers is turn-ing out to be far greater than the interest the bank can earn from such loans. As a
COMMENTARYEconomic & Political Weekly EPW june 14, 200815result, many commercial banks have begun extending credit through self-help groups and mainly through private microfinance institutions in rural areas. In addition, the union government is anxious to give legal status to such microfinance institutions.From the above brief account, it should be clear that the government no longer appears to have great trust in the ability of cooperative credit institutions to directly provide loans to agriculture. There was some hope in the revival of cooperative credit institutions, if the Vaidyanathan Committee’s recommenda-tions had been fully accepted that has not happened in effect. Add to this the present write-off of loans. Consequently, over time, the cooperative credit institu-tions will remain only in name. As for commercial banks, instead of at least withdrawing the state-owned commer-cial banks from directly financing agri-culture and handing over this task to local (district) level commercial banks, the policy now is to hand over this task to private microfinance institutions. What the consequence of the write off of loans will be on such credit institutions in the future remains to be seen.That leaves the self-help groups. These small bodies were and are collecting regular savings from their members and advancing loans to the needy amongst them from such savings in order to meet their occasional expenses. But now one finds that in many states, banks are repeatedly going to self-help groups and suggesting to them that they can and should take loans up to almost four times their total savings and give these to their members and the state government will thereupon give an outright subsidy of up to Rs 50,000 to such groups. Under such persuasion and pressure, it remains to be seen how long these self-help groups will be able to keep a sharp eye on not only their collection of savings but also the disbursement and repayment of loans to their members. Cooperative credit societies had been built precisely for this purpose. But, gradually, of the total loan advanced by the primary agricultural credit societies, four-fifths or more came from outside institutions – in the language of the villagers, government funds and the rate of interest charged to the borrowers was often less than the rate of interest paid on term deposits by commercial banks. Consequently, the members of the cooperatives realised that they had little stake in these loans and therefore, did not see the necessity of careful supervision of the advance of loans as well as their recovery. There is legitimate ground to fear the same fate for self-help institutions. Since the bulk of the loans will be from outside insti-tutions, there is a strong possibility of the demand for writing off loans in times to come.What Can Be DoneIn the present system of organisation and operation of rural credit institutions, the not-too-distant consequence of the waiver of loans has been and will be the demise of the people’s own credit institutions. Today nearly 85 per cent of cultivators in India have less than two hectares of culti-vated land, and they cultivate a little less than half the total cultivated area. Many commercial banks find it very expensive and difficult to advance them loans for agriculture, supervise utilisation and recovery. The NSSO survey of 2002 shows that the situation is gradually becoming similar to that of the moneylender-times of the past. There is reason to fear that this will become worse in the years to come. If these small farmers can form their own credit institutions and mainly with the help of their own savings supplemented by limited loans from banks, can manage to carefully spervise the sanction, utilisa-tion and recovery of loans, there is a fair chance of the survival of their families and growth in their agriculture. This will not only teach them how to run their own institution but also generate strength and confidence in their own ability. One rea-son for the inadequate progress in the direction of democratic values and institu-tions in our country is the old feudal atti-tude of depending on subvention from the superior. In order to be able to stand on one’s feet, understand what is in one’s best interest and proceed in that direction and understand if the different state institu-tions are doing the tasks properly in our interest, one must first have the experi-ence of running one’s own business as well as the collective enterprise of the group properly. That will train us to become proper citizens of a democratic polity. It is sad that our government, instead of pass-ing laws to help form such institutions and enabling them run in the proper direction, is busy destroying them and making us suppliants as in feudal times. It is impor-tant for our government, political parties and the intellectuals to realise that what we are doing in order to help the people is in reality axing at the base of the people’s effort to stand on their own feet.Farmers’ Suicide and DebtSomeone who has read so far might think: you seem to be more worried about the demise of people’s institutions and not about the suicide by poor farmers due to the unbearable burden of debt. In fact, I have not come across investigative reports into the real reasons for the sui-cides of farmers in different states during the last four or five years. Fortunately, I have just read an investigative report into the suicide by 116 sample farmers in the Vidarbha region of Maharashtra during 2004 by the Indira Gandhi Research Institute of Development Research. The report gives, in brief, the personal, family and landholdings accounts of every one of these 116 cases. From this, it appears that at most 41 of them (or 35 per cent) and at the least 17 (or 15 per cent) committed suicide due to loans taken for agriculture and were faced with re-sowing once or twice due to early failure of the rains. Twenty-four of these 41, that is, 20 per cent, had of course taken loans for farming and were faced with the need to re-sow once or twice due to failure of the rains but they also incurred heavy loans for weddings or treatment for sickness. The remaining two-thirds (65 per cent), of course, were under the burden of debt but that appeared to have little to do with agriculture. Some of them appeared to have spent the borrowed funds on liquor. Some others borrowed for weddings beyond their ability to repay and finally committed suicide. About a tenth of the sample cases appeared to be mentally imbalanced or suffering from a mental disorder and possibly committed suicide under its stress. Many others committed suicide due to family or unknown,

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