Farm Loan Waivers in India: Rs 3 Lakh Crore Spent, But At What Cost to Credit Culture?

Overview

Over the last 35 years, the Centre and states in India have spent more than Rs 3 lakh crore on various farm loan waiver schemes. While these waivers aim to provide relief to distressed farmers, multiple reports from the Reserve Bank of India (RBI) and other working groups warn that such policies can weaken the country’s credit culture, impact state finances, and ultimately hurt farmers’ long-term interests.

Key Highlights

• Farm loan waivers worth over Rs 3 lakh crore implemented by Centre and states in 35 years.
• Only around 50% of 3.7 crore eligible farmers actually received the benefits (SBI research).
• Maharashtra recently announced a Rs 35,000 crore waiver, covering about 30 lakh farmers.
• RBI and working groups repeatedly warn that waivers undermine repayment discipline and raise NPAs in agriculture.
• Many waiver announcements are closely linked to election cycles.

Recent Maharashtra Farm Loan Waiver

The Maharashtra government has announced a Rs 35,000 crore farm loan waiver scheme despite repeated caution from RBI and expert groups.

Key Features

• Total farmers covered: around 30 lakh.
• Non-defaulters: about 20 lakh farmers.
• Waiver cost for defaulters: approximately Rs 20,000 crore.
• Incentive for regular payers: Rs 50,000 per farmer who has been regular in repayments, costing roughly Rs 15,000 crore.
• Total fiscal outgo: around Rs 35,000 crore.

The state government claims its finances are strong enough to bear this burden and terms the waiver a necessary move to protect the farming community.

Evolution of Farm Loan Waivers in India

1. Central Government Nationwide Waivers

Agriculture and Rural Debt Relief Scheme, 1990 (ARDRS)

• Launched on May 15, 1990.
• Covered short-term loans and overdue term-loan instalments outstanding as on October 2, 1989.
• Applied to Public Sector Banks (PSBs) and Regional Rural Banks (RRBs).
• Maximum relief: Rs 10,000 per farmer.
• No distinction based on landholding size.
• Estimated cost: about Rs 10,000 crore (equivalent to Rs 50,600 crore at 2016–17 prices).

Agricultural Debt Waiver and Debt Relief Scheme, 2008 (ADWDRS)

• Nationwide scheme implemented in 2008.
• Broader institutional coverage: Scheduled Commercial Banks (SCBs), RRBs, cooperative credit institutions (urban and rural), and local area banks.
• Targeted higher relief for small and marginal farmers (landholding up to five acres).
• Estimated cost: about Rs 52,500 crore (equivalent to Rs 81,200 crore at 2016–17 prices).

2. Rise of State-Level Waivers Since FY15

From 2014–15 onwards, state governments became the main drivers of farm loan waiver schemes. According to RBI’s internal working group on agricultural credit:

• 10 states have announced loan waivers since FY15.
• Total amount: around Rs 2.4 lakh crore, about 14% of 2016–17 GDP at current prices.
• Significantly higher than the combined cost of the two nationwide programmes of 1990 and 2008.

Selected State Farm Loan Waiver Programmes (Post-2014)

State	Year	Amount (Rs crore)
Andhra Pradesh	2014–15	24,000
Telangana	2014–15	17,000
Tamil Nadu	2016–17	52,800
Maharashtra	2017–18	34,020
Uttar Pradesh	2017–18	36,360
Punjab	2017–18	10,000
Karnataka	2018–19	44,000
Rajasthan	2018–19	18,000
Madhya Pradesh	2018–19	36,500
Chhattisgarh	2018–19	6,100
Maharashtra	2019–20	22,000
Telangana	2024	31,000
Jharkhand	2024	3,000

Election Linkages and Policy Timing

The RBI’s 2019 Report of the Internal Working Group to Review Agricultural Credit highlights a strong association between farm loan waiver announcements and elections:

• The 1990 and 2008 nationwide waivers were announced in the run-up to the 1991 and 2009 parliamentary elections.
• Eight out of ten loan waiver announcements since 2014 were made within 90 days of the respective states’ election results.

This pattern suggests that waivers are often used as a political tool rather than as part of a long-term, structural solution to agrarian distress.

Fiscal Impact on States

Farm loan waivers exert significant pressure on state finances and are typically implemented over several years.

Budgetary Effects

• Waiver impact is usually spread over 3–5 years due to phased rollout or staggered payments to banks.
• Fiscal burden varies by state, ranging from around 0.1% to 1.8% of Gross State Domestic Product (GSDP).
• Example: Chhattisgarh in FY19 saw an impact as high as 1.8% of GSDP.
• In FY20 (BE), states allocated between 0.1% and 2.0% of GSDP towards farm loan waivers.

Impact on Agricultural Credit and Banking Sector

Credit Growth and Disbursements

• RBI data points to a sharp deceleration in the growth of outstanding agricultural credit during years when loan waivers are implemented.
• A decline in agricultural credit disbursements is observed during waiver years, with growth only bouncing back later.

RBI’s Concerns

The RBI has repeatedly expressed serious reservations about loan waivers:

• Waivers encourage borrowers to delay or stop repayments in anticipation of future relief.
• This weakens the credit culture and undermines financial discipline.
• Borrowers’ credit histories are adversely affected, hurting their ability to access fresh agricultural loans.
• Banks become more risk-averse in lending to the agriculture sector.

Rising NPAs and Moral Hazard

• The RBI internal working group noted that Gross Non-Performing Assets (NPAs) in agriculture stood at about 8.44% as on March 31, 2019.
• In states that implemented farm loan waivers in FY18 and FY19, NPA levels in agriculture increased.
• In contrast, most other states (except Bihar, Odisha, and Haryana) saw either stable or declining NPAs between FY17 and FY18.
• This pattern indicates a significant element of moral hazard, where borrowers may strategically default in expectation of loan waivers.

Beneficiary Coverage and Effectiveness

• Despite the huge fiscal cost of more than Rs 3 lakh crore over 35 years, only about 50% of 3.7 crore eligible farmers actually received waiver benefits, as per a State Bank of India (SBI) research report.
• This indicates significant implementation gaps and raises concerns over the targeting efficiency of waiver schemes.

Summary: Relief vs. Long-Term Risk

• Farm loan waivers provide immediate relief to indebted farmers and can ease short-term distress.
• However, they also:
  • Strain state finances and crowd out other development spending.
  • Weaken repayment discipline and encourage expectations of future waivers.
  • Lead to higher NPAs and make banks reluctant to lend to agriculture.
  • Benefit only a fraction of intended beneficiaries, leaving many farmers outside the safety net.
• Expert bodies like the RBI working group argue that while waivers may be politically attractive, they risk harming farmers’ interests in the medium to long term by damaging credit culture and limiting access to formal finance.

Source: Indian Express