The Hindu Business Line : Interest waiver, a short-term relief

Going by the Prime Minister, Mr Atal Bihari Vajpayee's relief package announced on Wednesday, it appears that the views of the Finance Ministry and Planning Commission have prevailed over that of Krishi Bhawan.

NEW DELHI, Nov. 13

IT is almost certain now that there will be no outright waiver of interest on crop loans availed by farmers during the drought-affected 2002 kharif season.

Both the Finance Ministry and the Planning Commission have rejected the Agriculture Ministry's proposal to grant farmers in drought-hit areas a complete interest waiver on all farm loans for a one-year period from July 2002 to July 2003 — a move that would result in banks forgoing interest income of nearly Rs 5,000 crore.

According to official sources, the Finance Minister, Mr Jaswant Singh, has made it clear that the maximum relief that can be provided is conversion of the principal amount as well as interest in respect of short-term loans due in the current fiscal into term loans. This could be accompanied by a suitable rescheduling of the repayment period. Any further relief involving total waiver of interest would ``vitiate the borrowing discipline in the country''.

Echoing a similar view, the Planning Commission has held that interest waiver will ``send a wrong message to farmers that loans need not be repaid''.

In his statement, Mr Vajpayee said, ``considering the gravity of the situation, I have decided to provide direct relief to our farmers from payment of crop loans extended to them'' and ``the Government has, therefore, decided not to effect any recovery of crop loan, including interest, during the current financial year''.

The sources pointed out that the Prime Minister's package only mentions about no recovery of crop loans taking place during the `current financial year'. In other words, there would be no outright waiver, but only a deferment of loan recovery.

In fact, there is nothing new in today's announcement, considering that provisions pertaining to rescheduling of crop loans in the event of natural calamities already exist in the guidelines framed by the Reserve Bank of India (RBI) in June 1998.

These, in turn, provide for (a) conversion of principal amount and interest in respect of short term loans due in the year of occurrence of natural calamity into term loans along with extension of repayment period up to 5-7 years, (b) rescheduling of instalments of principal/interest in respect of term loans for three years, or even longer period, (c) treatment of the converted/rescheduled dues as `current dues' not chargeable to compound or penal interest and (d) banks advancing fresh crop loans to the affected farmers.

The sources noted that the guidelines are in the nature of standing instructions to banks, which are triggered off the moment an area is declared as being drought affected.

Accordingly, the RBI had already, on July 27, directed banks to restructure their agricultural advances, so as to convert all 90-day crops 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.

But according to the Agriculture Ministry, mere deferment of interest or rescheduling of loans will provide little relief to farmers.

Even if a farmer does not have to pay interest on a crop loan taken during kharif 2002 during rabi 2002 (when he avails of a fresh loan), he would end up in kharif 2003 with the double burden of paying the interest and principal on both the loans.

The only solution, then, is to grant him a complete interest waiver of the loans availed in this year's kharif season.

During kharif 2002, banks are estimated to have disbursed crop loans totalling Rs 20,809 crore in the 14 drought-affected States.

The interest liability on short-term loans would have worked out to Rs 2,029 crore, with that on term loans amounting to another Rs 2,957 crore. The total interest liability on disbursement for kharif 2002 along with corresponding term loan liability would add up to Rs 4,986 crore.

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