The Hindu Business Line : Compounding troubles for farmers

The rate of interest charged on farm loans is not as important as the method of charging it. By compounding, in defiance of a Supreme Court judgment and RBI directives, cooperative banks are all but practising usury. In absolute terms, the financial loss caused to the farmers of India in the 1980s and the 1990s could be as high as Rs 3 lakh crore

March 31 witnessed an event that had never happened before. The Central government transferred to the Reserve Bank of India and the National Bank for Agriculture and Rural Development Rs 1,700 crore to fulfil a Budget promise that a sum equal to 2 percentage points of the interest rate would be credited to farmers' loan accounts. Since the promise benefits this year those farmers who took crop loans not exceeding Rs 1 lakh for the last kharif and rabi crops, the net effect may not be spectacular. Some of these loans were taken at higher than 10 per cent. The beneficiary farmers would still have to bear rates of interest higher than 8 per cent. Next year, the benefit may be more substantial.

The Finance Minister promised, in his Budget speech, that the rate of interest for crop loans up to Rs 3 lakh will not exceed 7 per cent. On March 31, 2007, if and when the government credits 2 percentage points to the relevant loan accounts, the agriculturist debtors will pay a rate of interest as low as 5 per cent. The Maharashtra Government, in its turn, has decided to credit a sum equal to 1 percentage point of the interest rate. That would make the rate of interest payable by the farmers in Maharashtra just 4 per cent. Hopefully, other States will follow suit.

METHOD, THE KEY

All this is being done with an air of grand magnanimity. The Central and the State governments are apparently under the impression that this is enough to stave the tide of farmer suicides.

The fact is that the rate of interest charged on the agriculturists' loan accounts is not as important as the method of charging it. All cooperative banks and societies charge the farmers compound rates of interest at monthly, quarterly, or half-yearly rests in flagrant defiance of a Supreme Court judgement and RBI directives dated January 31, 2003, that interest should not be charged at monthly rests on advances for agriculture and allied activities.

Experience shows that compounding at monthly rests for a five-year loan amounts to a simple rate of interest as high as 24 per cent per annum. The Finance minister may have scored a political point in giving the farmers a first-time pleasure of seeing the government actually crediting some money in their accounts. However, if the system of compounding interest is not eradicated, the farmers would still be required to pay effective rates of interest of more than 24 per cent.

PROTECTION THEN

This is the magnanimous gesture of a government in independent India that is on the verge of being recognised as an emerging superpower. Let us compare that with what the colonial government did as early as in 1918. The British government passed the Usurious Loans Act.

The Madras Provincial Government passed a further amendment in the application of the Act to agriculturists. The Act prohibited charging of a rate of interest higher than the official rate, which was till 1983 as low as 5.5 per cent. Further, the Usurious Loans Act permitted the courts to reopen cases where excessive rates of interest were charged. All compounding of interest was considered as excessive charging and, further, the interest would stop accumulating as soon as it equalled the original sum borrowed.

Unfortunately, after Independence, the farmers lost these protections because of the passing of the Banking Regulation Act, 1949 (BRA). Section 21-A of the BRA made the provision of the Usurious Loans Act, 1918 inapplicable to transactions of loan between a bank and a borrower.

In a later case, the Supreme Court held Section 21-A ultra vires of Article 14 of the Constitution on the ground that a law which requires or compels courts to implement harsh, unequal and unconscionable transactions providing for payment of compound interest or usurious rates of interest by depriving the debtors of their right to claim relief under the provisions of the Usurious Loans Act or similar State laws would offend Article 14. The same court raised issues about the competence of the Centre to legislate on matters relating to agricultural loans.

THE BIG `IF'

Unfortunately, the validity of Section 21-A of the Banking Regulation Act has not been adequately scrutinised by the Supreme Court. If this Section did not exist, the farmers could be charged nothing but 5 per cent simple interest. As against that he will be subject to, if — and it is a big if — the cooperative banks are disciplined, 5 per cent compound rate of interest.

That is all the progress that has been made since 1918 in the direction of giving relief to the farmers suffering under heavy burden of debt.

During this very period, under the guise of socialist planning, governments in Independent India followed policies that imposed negative subsidies on agricultural produce that amounted to a turnover tax of 83 per cent. In absolute terms, the financial loss caused to the farmers of India in the 1980s and the 1990s could be as high as Rs 3 lakh crore.

One wonders what the reaction of the British government would have been if it were presented with the current situation of thousands of farmers committing suicides?

Following the Deccan riots by farmers, the British government not only appointed a `Deccan Riot Commission' but started such institutions as the taqavi loans and brought in such legislation as the Usurious Loans Act. On the other hand, governments in independent India appear to be exploiting farmers through negative subsidies and charging 5 per cent interest rates without making clear if it is compound or simple. One wonders who gained independence after 1947? Certainly not Bharat.

(The author is founder, Shetkari Sanghatana and Member of Rajya Sabha. He can be contacted at sharad.mah@nic.in.)

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