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March 01, 2008 12:24 IST
Banks will get reimbursement of Rs 60,000 crore (Rs 600 billion) for the waiver over three years.
The measures
Banks will have to waive off Rs 50,000 crore (Rs 500 billion) of overdue agricultural loans to marginal farmers (holding up to 1 hectare) and small farmers (holding between 1 and 2 hectares) as on December 31, 2007.
A one-time settlement scheme has been announced for other farmers, who will get a rebate of 25 per cent (amounting to Rs 10,000 crore or Rs 100 billion) against payment of the remaining 75 per cent of the loans. Banks will get reimbursement for the waiver over three years. The government, Nabard and the Reserve Bank of India [Get Quote] will work out the details of the scheme.
The context
The proposal comes in the backdrop of increasing farmer suicides because of rising indebtedness. Small and marginal farmers are unable to make repayments for loans due to loss of crops as a result of natural calamities or other reasons.
If farmers continue to be defaulters, they are unable to avail of fresh loans. Such circumstances have forced many to approach moneylenders to get credit for which they are charged sky-high rates.
According to NSSO's All-India Debt and Investment Survey, 2002, though the share of non-institutional sources of credit for farmers declined from 92.7 per cent in 1951 to 30.6 per cent in 1991, it increased to 38.9 per cent in 2002 mainly due to increase in moneylenders' share.
The impact
The debt waiver and one-time-settlement are expected to provide benefit to about 30 million small and 10 million marginal farmers. After being relieved of the debt burden, farmers will be eligible to get fresh loans for agricultural operations.
The package would put a huge burden on the fiscal front and the government would have to find ways to fund the farm package, said Finance Minister P Chidambaram. The banking system is expected to have an additional Rs 60,000 crore (Rs 600 billion) of liquidity for lending over a period of three years, but it is not yet clear in what form commercial banks of both public and private sectors will be compensated by the government.
P K Gupta, the chairman of United Bank of India, and A C Mahajan, the chairman of Allahabad Bank [Get Quote], said the impact of the debt waiver and OTS on banks would depend on the extent and mode of compensation received from the government. Bangiya Grameen Vikash Bank, the second largest regional rural bank in the country, is overwhelmed with the scheme.
"This scheme will strengthen the balance sheet of the bank to a large extent as NPAs in agricultural lending are comparatively much higher, owing to the fact that most of the credit is related to small and marginal farmers, who are vulnerable to any adverse situation," said Ambarisha Nanda, the chairman of Bangiya Grameen Vikash Bank.
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