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Harish Damodaran

According to officials, the proposal did not tantamount to populism because what was being sought was only a waiver of the interest component and not the entire loan per se.

NEW DELHI, Aug. 10

THE Centre is in a fix over the Agriculture Ministry's proposal for a complete interest waiver on all farm loans for the period from July 2002 to July 2003. The demand - mooted in the context of the present nation-wide drought - is expected to result in the banking sector forgoing interest income of over Rs 6,000 crore, which would have to be made good by the exchequer.

The Reserve Bank of India (RBI) has already directed banks to restructure their agricultural advances, so as to convert all 90-day crop loans made during the current kharif season to term-loans of 3-5 years and also defer recovery of principal and interest amount in respect of the converted loans.

Similarly, the instalment of principal and interest on term loans is also to be rescheduled for a period of three years. Besides, banks have been told not to compound interest on the dues converted/rescheduled.

But according to the Agriculture Ministry, these measures are not adequate. "Mere deferment of interest or principal amount will provide little relief to farmers. What is required is a total waiver, at least of interest,'' officials in the Ministry said.

They noted out that under the RBI's scheme, a farmer, who has taken a seasonal agricultural operations loan for kharif 2002, would not have to pay interest during the coming rabi 2002 season, when he avails of a fresh crop loan and the earlier loan is ordinarily due for amortisation. Instead, he will have to pay the interest on the 2002 kharif loan only during kharif 2003, for a simple one-year rather than six-months period.

"Such a scheme of rescheduling loans will, however, only increase the farmers' burden. This is because during kharif 2003, he will end up paying the interest and principal on not just the kharif 2002 loan, but also on the rabi 2002 loan. What we are proposing is a complete waiver of interest on all farm loans for the period from July 2002 to July 2003,'' the officials said.

According to them, the proposal did not tantamount to populism because what was being sought was only a waiver of the interest component and not the entire loan per se.

"There is no loan write-off involved here, as it happened in the 1980s. In this case, the farmer will not cough up interest on the loan taken during kharif 2002, though he would have to still pay the original principal sum. Similarly, on long-term loans, the interest and outstanding amounts payable during kharif 2003 would be treated as the same as prevailing at the start of kharif 2002,'' the officials added.

However, given the sheer magnitude of agricultural loans, even waiver of interest would entail huge interest losses for banks. By the Agriculture Ministry's own reckoning, the cost of interest waiver for a one year period works out to a whopping Rs 6,040 crore, of which Rs 2,360 crore would be on short-term loans and Rs 3,680 crore on outstanding medium and long-term loans. The banks would have to be re-imbursed for these losses by the Centre.

During 2001-02, total institutional credit to agriculture was estimated at Rs 66,771 crore, of which short-term loans accounted for Rs 42,735 crore and medium/long-term loans Rs 24,036 crore. The share of commercial banks in the total advances of Rs 66,771 crore was Rs 34,735 crore, with that of cooperatives and regional rural banks being Rs 27,080 crore and Rs 4,956 crore, respectively.

It remains to be seen how receptive the Centre would be to Krishi Bhawan's proposal. The Finance Ministry, in particular, may push for a more watered-down version, say granting the interest waiver only for six months rather than one year and also fixing a cap on the total waiver amount for individual farmers.

But considering the intensity and spread of the drought - the Agriculture Minister, Mr Ajit Singh, has already declared it as being `worse than 1987' - there is little doubt that the Centre would be under tremendous pressure to do `something concrete'.

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Govt in fix over Ministry's waiver move on farm loans — To cost Rs 6,000 cr for banking sector

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