A miller, a trader and a farmer walk into a bank. Each carries the receipt for a bag of wheat worth ₹20. The miller walks out with a loan of ₹16, the trader with ₹14, and the farmer with ₹12. What happened? The banker did not want to be painted as the villain if the farmer’s loan went belly up. Can we blame him?
As of March 2016, only 6% of agricultural loans went bad while companies defaulted on 23% of their loans, show RBI figures. Yet, to the banker, the further any commodity moves from the farmer, the “safer” it becomes. He can auction the commodity, attach property, restructure the loan, or go to court if the processor or trader defaults. If any dispute over loan repayment arises with the farmer, the banker has already lost.
The absence of an effective dispute resolution mechanism between farmers and banks makes banks avoid exposure to small-holder agriculture. So the farmer has also lost. If we can solve this vexed problem, farmers will get bank finance more easily. The farm distress and the suicides will abate.
The share of agricultural credit in total portfolio has stagnated at about 13% in the last decade. While the RBI and government are taking prompt corrective action to resolve corporate loan disputes, there is little thinking around easier agricultural debt recovery. It is a political hot potato, despite the slogan of inclusive growth.
The delay impacts 56 million rural lives daily. Indian farmers need capital to produce and market crops worth more than ₹15 lakh crore annually. The total farm credit target this year is only ₹10 lakh crore. The deficit is further widened by such systemic hurdles.
Loan waivers and interest subvention schemes are never the answer. Farm loan waivers will leave farmers in Maharashtra, UP, Karnataka, Rajasthan, Madhya Pradesh, and Punjab worse off. Banks will be even more cautious henceforth, triggering the next vicious cycle. Without institutional capital, Prime Minister Narendra Modi’s dream of doubling farm incomes is impossible. Farmers remain at the money lender’s mercy.
There is undoubtedly progress in solving the other challenges to rural lending: agricultural and commodity risks, high transaction costs, volatile incomes, and families without formal credit history. Thanks to information and communication technology, farmers’ collectives, modern warehousing, and financial services, building blocks are available for channeling greater capital flows to agriculture, especially tenant farmers and women farmers.
Learning from microfinance that uses the strength of social relationships, banks are willing to give post-harvest loans on the strength of commodity supply chain relationships such as negotiable warehouse receipts. The system is turning tamper-proof with the arrival of two commodity repositories in July, under the Warehousing Development and Regulatory Authority, that will maintain an online record of all negotiable warehouse receipts issued by accredited warehouses and the commodity balances in an account.
Credit reporting bureaus covering microfinance institutions are helping women farmers capitalise on the reputations they establish as microfinance borrowers to access post-harvest loans.
Yet, no banker will come forth. Other commercial relationships are similarly hobbled. Contract farming had no effective way for dispute resolution between farmer and company, affecting business. The new National Agricultural Market won’t succeed without one.
Resolution of contractual disputes and enforcement of the sanctity of commercial contracts is thus the most important agricultural reform. Farmers will be the first to see its value.
As approaching courts is unfeasible, quick and easy ways are needed. Several countries have evolved a dispute mediation law for loans above a certain size, and time-bound low-cost out-of-court procedures. Farmers are provided governmental legal and financial assistance. Such mechanisms avoid the “all or nothing” outcomes typical of trial judgments, encourage communication, and reduce risk for both parties. Most importantly, they reduce political confrontation. Once they are back in the formal credit system, the farmer suicides will stop.
Farm families in financial difficulty face emotional distress, hunger, health problems, family violence, and social stress. They will build better lives if we remove the hurdles that make agriculture a business pariah. In our zeal to protect the “small guy”, we have condemned him to stay small.
The corporate bankruptcy code was introduced to restore banker confidence and ease the flow of credit to healthy companies. Agriculture too needs effective dispute resolution mechanisms as a first step to health. Everybody seems to care about the family farm, not the family bank. It is in every farmer’s interest to correct the perception.