Credit-friendly agriculture

In response to widespread distress, several state governments, including Telangana, Andhra Pradesh, Maharashtra, Uttar Pradesh, announced debt waivers. Studies reveal that although waivers will provide immediate relief to farmers, in the long run, they raise impediments of moral hazard – they encourage farmers to avoid repaying loans in the expectation of a waiver. As a response to low repayment rates, banks are blocking further loans, especially to small, marginal and tenant farmers. Most moneylenders also operate under the guise of farm input sellers, traders and commission agents. This inter-locked credit-input and output market has resulted in enhancing the scope for farmers' exploitation by moneylenders, who artificially hike the prices of inputs and suppress the prices of farmers' output, causing massive agrarian loss. Moneylenders hover in rural areas as loan-sharks to provide instant loans without procedural delays and documentation. But, they charge exorbitant interest rates, often more than 60 per cent per annum, and collect repayments by force and threat.

Over the last fifty years, successive governments have tried to eliminate private moneylenders from the rural credit markets by strengthening formal financial institutions through the nationalisation of banks, encouraging cooperatives, strengthening Regional Rural Banks, among others. But, these formal institutions have been unable to meet the credit requirements of the farmers. They together contribute to less than 50 per cent of the credit accrued. Further, these formal institutions mostly attend to the needs of the big landlords who provide assured collateral with a complex documentation process that takes several months for sanctioning and release of the loan amount. Whereas, small, marginal and tenant farmers require mostly small amounts for the immediate purchase of inputs, like seeds, fertilisers, pesticides etc. But, sometimes they also need large capital investment for digging bore wells, children's marriages, treatment for ill-health and fulfilling educational needs. Private moneylenders capitalise upon these opportunities to grab agricultural land and other assets from the defaulting farmers by charging exorbitant interest rates or by inducing them to accept larger credits than they can manage. Ultimately, the farmers are evicted off their land – their only source of livelihood.

During the 1990s, micro-finance institutions spread their operations in the southern states. There is little difference between private moneylenders and micro-finance institutions. Although their interest rates are slightly lower than the moneylenders, they still charge over 25 per cent per annum. Moneylenders and micro-finance institutions (MFIs) use cruel tactics to recover loans including criminal intimidation, sexual harassment, and forced labour against borrowers.

Frequent loan waivers are not the solution to indebtedness. It hampers financial discipline and leads to moral hazard. Past experiences show that loan waivers do not contain farmer suicides, even though they provide some relief to indebted farmer families. In the period after a loan waiver, the banks ration loans to small farmers utilising subtle methods like delaying sanctions, demanding higher collateral security, reducing the quantum of the loan and asking for lengthy and complex documentation. The credit flow, especially to small farmers, will be reduced post-loan waiver.

Tenancy has been increasing over the years and has affected 42 per cent cultivators in Andhra Pradesh and 18 per cent in Telangana. More than 90 per cent of the land-lease market in India is not recorded, hence, tenants will be in no position to offer land as collateral while seeking bank loans and borrowing from private money lenders with high interest rates. This drives them into crisis, forcing them into debt and suicides.

Realising the difficulty of tenant farmers in securing loans from the formal sector, many state governments including AP and Telangana introduced Loan Eligibility Cards (LECs) to grant tenant farmers the eligibility to secure loans from the formal sector. The list of tenant farmers will be prepared by the revenue/agricultural authorities with assistance from the gram sabha. The tenant can secure loans on the value of the crop raised, but not on the land, while the landowner can still take loans on the land. The landlords are guaranteed ownership rights over the tenanted land. They are even eligible to get loans, other than the crop loans. However, there are still drawbacks in the usage of LECs, (i) not all tenants apply for LECs; (ii) of those who apply, not all get issued the LECs; (iii) of those who possess LECs, only a few can secure bank loans. For example, only 21 per cent of the tenant farmers secured LECs, of which only 15 per cent got loans from banks. Therefore, only 3 per cent of the tenant farmers' availed loans from the formal sector. The many restrictions on the use of LECs continue to be a looming problem.

The Model Agricultural Land Lease Act, 2016, removes all these restrictions and regulations and lends flexibility to both the landlord and the tenant to mutually decide upon the terms and conditions governing the lease agreement. It enables the landlord to charge a market rate and take back the land which makes them willing to opt for formal tenancy and facilitates the issue of LECs. Tenancy as an institution should be promoted by the government, as it temporarily transfers land from the landlord to landless/marginal farmers, who bank upon cultivation and derive the essential livelihood from it. This increases the efficiency in agriculture and also increases the cultivated area and cropping intensity. Sharecropping as an institution must be promoted, in which both tenants and owners share the benefits and risks in rain-dependent agriculture.

Tenant farmers are vulnerable to agrarian distress conditions. Their inclusion in formal agricultural development programmes is crucial to reduce farmers' suicides and distress. There is a need for liberalising, legalising and popularising Loan Eligibility Certificates (LECs), to make tenant farmers eligible for all government schemes like credit, crop insurance, input subsidy, and other benefits hitherto restricted to their purview.

Farmers' collectives need to be promoted to alleviate distress and improve the bargaining power of small farmers. These collectives can take any shape and size – like farmers' cooperatives, farmers' producer companies (FPCs), self-help-groups (SHGs), farmer interest groups (FIGs) or even land-pooling and collective farming and marketing.

A law needs to be enacted by the Central government to ensure that the interest rates charged by both formal and informal financial institutions is not be more than 8 per cent per annum. The losses/additional expenses in serving the small and tenant farmers by financial institutions need to be subsidised by the government.

In the long run, market-based instruments ought to be developed to overcome farmers' distress. Crop insurance should replace knee-jerk loan-waivers to alleviate farmers' distress and crop loss. Arrangements should be made to ensure that all farmers receive claims when they incur losses under the crop insurance scheme. The crop insurance scheme under Prime Minister Fasal Bhima Yojana (PMFBY) must be popularised and streamlined to cover all farmers irrespective of their loan status. Covering all farmers will also reduce the premium rates and subsidy costs incurred by the governments.