No need to repay for Indian farmers as debt traps poor

Bloomberg

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A woman labourer plants paddy saplings in the fields on the outskirts of Hyderabad, India. A woman labourer plants paddy saplings in the fields on the outskirts of Hyderabad, India.
Vattikuti Prasad grows rice, bananas and sugar cane on his farm as big as 27 football fields in a part of southeastern India where most farmers own plots the size of just one. He has two homes, including a four-bedroom house he rents out in a nearby town.
This year Prasad took out at least 120,000 rupees ($1,940) in cheap farm loans from State Bank of India and said he planned to use them to open a third branch of his pesticide and seed business in the state of Andhra Pradesh. And for the second time since 2008, he won’t be paying the money back: The government has offered to forgive 350 billion rupees in agricultural loans, according to a report seen by Bloomberg News.
“It is easily available, so I’m taking it,” Prasad, 37, said while counting a wad of 1,000-rupee notes from his shop’s cash drawer under a noisy ceiling fan in the punishing heat. As many as 80 percent of fellow businessmen in his town of Tanuku, a 400-kilometer (250-mile) drive from Hyderabad toward the Bay of Bengal, have spent their farm loans on all kinds of things, especially buying more land, he said, with the confidence the money is free. “Why should we repay now?”
As part of campaign promises to win re-election earlier this year, officials in Andhra Pradesh as well as neighboring Telangana state promised farmers debt relief. Andhra Pradesh offered to waive as much as 150,000 rupees per farmer, Telangana 100,000 rupees. Both states are following a 2008 precedent, when the central government forgave 710 billion rupees in loans to 40 million farmers nationwide, partly in response to a wave of suicides linked to indebtedness.
Credit discipline
“It took several years for the credit discipline to return after the 2008 waiver, and now it is all going to deteriorate again,” said Vishal Narnolia, a Mumbai-based bank analyst at SMC Global Securities Ltd. “It’s true that many marginalized farmers in India are born with debt and die in that debt. But we need better systems to address that issue than giving blanket loan waivers.”
Andhra Pradesh would reimburse banks for the waivers, which total an estimated one-third of the state’s 949 billion rupees in farm loans as of Sept. 30, according to the report, drafted by a government-appointed panel led by Pamidi Kotaiah, a former chairman of National Bank for Agriculture and Rural Development.
Expectations of waivers based on politicians’ promises turn most farm borrowers into customers who don’t repay even when they can easily afford it, said V.B. Bhagavathi, general manager for financial inclusion at Andhra Bank (ANDB), the state’s second-biggest lender.
‘Critical stage’
This is “a very sensitive stage and very critical stage for the banks in Andhra Pradesh,” Bhagavathi said in an interview at the lender’s Hyderabad headquarters. “Farmers stopped paying their loans on time, which has resulted in a large number” of defaults. Formal government announcement of the panel’s report is expected by year-end, he said.
Reserve Bank of India Governor Raghuram Rajan has spoken out against large-scale debt relief.
“Waiving off loans is an unhealthy activity,” Rajan, a former International Monetary Fund chief economist, said at a Sept. 15 conference in Mumbai. “Every time a waiver is done, it diverts access to credit and shrinks credit availability.”
India’s agricultural-loan system is intended to help small farmers get cash to buy seeds and fertilizer and pay for labor. Still, a “large number” of deserving farmers are unable to obtain bank loans, as they can’t provide a land title as guarantee, Finance Minister Arun Jaitley said while presenting the federal budget in July.
‘Powerful people’
The loans instead benefit big farmers, businessmen, traders and moneylenders, who are often the largest landowners in villages, said G.V. Ramanjaneyulu, executive director of the nonprofit Centre for Sustainable Agriculture. They see loan waivers as a way to get free money, he said.
“These are powerful people in the villages, and they have money and don’t need loans, yet in the name of farming they take the money,” Ramanjaneyulu said in an interview at his office in Hyderabad. “The actual people who are in crisis are never benefited out of it.”
Nationwide, banks are facing a 12 percent stressed-asset ratio, which includes nonperforming loans and restructured assets, the highest level in 14 years, according India Ratings & Research Pvt., the local unit of Fitch Ratings Ltd. India’s central bank stipulates lenders dedicate 18 percent of portfolios to agricultural loans.
Largest exposure
While bad-loan breakdowns by state are unavailable, Mumbai-based State Bank of India (SBIN) and Andhra Bank have the largest exposure to farm loans in Andhra Pradesh, followed by Bengaluru-based Syndicate Bank (SNDB), Chennai-based Indian Bank (INBK) and State Bank of Hyderabad, according to the State Level Bankers’ Committee, a government-appointed group dedicated to improving access to financial services.
Telangana state paid the first installment of its 170 billion rupee debt-relief program to banks in September. That’s about a quarter of the total promised by the government, the Press Trust of India reported.
Indian banking rules allow state governments to order banks to reschedule agricultural loans when a major catastrophe such as a drought or hurricane severely limits crop production. Even then, banks are required only to allow customers to postpone payment by as much as three years, Bhagavathi said. In July, the central bank rejected a request by Andhra Pradesh to force banks to delay loan repayments.
Low rates
For borrowers, crop loans are attractive because they typically carry interest rates of less than half of the 10 percent charged for conventional home loans. Getting such a loan can take fewer than three days if the applicant has documents to prove land ownership, according to Andhra Bank branch managers.
“Farm loans are by far the cheapest loans you can get out there,” S. Ananth, an Andhra Pradesh-based independent researcher who has studied rural financing for the central bank, said in an interview. “So everybody who has land takes them, whether they actually need it or not.”
Bank employees focus on ensuring that borrowers’ documents are legitimate, not on what customers use the loans for, according to Andhra Bank managers in Tanuku and nearby Amalapuram.
“That is beyond our capacity,” I.S.N. Murthy, a senior bank manager, said in an interview at his office in Amalapuram. “There’s just one field officer, and he can’t track everything.”
Loans denied
Three years ago, Andhra Pradesh introduced a plan to issue identification cards to tenant farmers to make them eligible for bank loans. Landowners were reluctant to let farm lessees have the information required to get the document, Ananth said. Andhra Pradesh and Telangana combined have about 4 million tenant farmers, according to the Centre for Sustainable Agriculture. Only 187,000 of those in Andhra Pradesh had obtained tenancy cards as of early September, State Level Bankers’ Committee data show.
Even with cards, loan applications by tenant farmers are often denied because landowners may have already borrowed using the same parcel as collateral, said the Centre for Sustainable Agriculture’s Ramanjaneyulu. High default rates among lessees also have deterred banks from lending, according to a Bankers’ Committee report in September.
Shunned by banks, millions of tenant farmers such as Challabattula Nageshwararao turn to village moneylenders. At the start of each planting season, Nageshwararao goes to the moneylender to get a loan of about 200,000 rupees for fertilizer, seeds, pesticides and labor to grow rice on 10 acres in Veluvalapalli village, near the coast of the Bay of Bengal. At 24 percent interest, it’s five to six times more expensive than a bank loan.
Don’t bother
“I don’t even bother going to the bank because they will ask for all sorts of documents that I don’t have,” Nageshwararao, 50, who has been farming in the same village for the past 20 years, said as he walked alongside his rice paddies. “But when I need any money from the moneylender, I just go to him and he gives it to me. It’s that easy.”
In addition to paying interest, Nageshwararao must sell his harvested rice to the moneylender, who sets the price. This dual role as financier and buyer is common and gives moneylenders total control, said the nonprofit center’s Ramanjaneyulu, who holds a doctorate in agriculture.
“These moneylender traders, they can charge whatever they want, and the farmer has no choice but to pay,” he said. “This is the serious crisis in agriculture.”

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