Financial Daily from THE HINDU group of publications
Wednesday, Apr 20, 2005
Agri-Biz & Commodities - Insight
Columns - Down to Earth
Farm loan straitjacket loosened
The basic cause of farmer indebtedness is that agriculture is a losing proposition. To blame are the various government measures that depress farm prices and deny the farmers the advantage of a free market.
It will stop all measures to deprive the farmers of their land on account of their inability to repay loans. It will also provide that the amount of accumulated interest on an agricultural loan shall not exceed the principal. The State Government undoubtedly deserves praise for this bold move.
However, it is necessary to understand how the system traps the farmer in indebtedness. The basic cause of farmer indebtedness, of course, is that agriculture is a losing proposition. To blame are the various measures taken by the Centre that have had the effect of depressing agricultural prices and denying the farmers the advantage of a free commodity and input market. That makes all agricultural loans both void in law and immoral in public policy. Add to that the various methods used by banks.
Discussions on agricultural credit consider the proportion of credit extended by the organised sector as one of the indices of the health of the credit system. The presumption is that private lenders are villains and the organised sector banks paragons of virtue. The unregulated operations of the private money-lenders include a number of invidious practices, especially usurious rates of interest. These Sahukars also use harsh and unscrupulous means for securing the repayment of loans and interests.
Officially, private money lending has been abolished. Yet, it continues to be the main source of agricultural credit. While all those in authority appear to presume that rooting out private money lending is a desirable goal, there is little realisation that the organised sector banks are hardly any better.
In a recent case, a regional rural bank lent Rs 97,000 to a farmer for the purchase of tractor. By the time the bank went to the court for realisation, it had grown to a hefty Rs 19 lakh. What rates of interest are the organised sector banks permitted to charge? This is governed by the directives of the Reserve Bank of India, issued under Section 21 of the Banking (Regulation) Act, 1949.
The RBI has issued a series of circulars from March 14, 1972 to September 15, 1984, often contradicting one another. But one recognised principle has been that the agricultural loans stand on a different footing.
Farmers get their income on the sale of crops, generally once a year and, therefore, the repayment schedule should be fixed so that the payment is demanded only when the farmers have funds. The compounding of interest is, therefore, ruled out as far as farm loans are concerned.
Maharashtra recognises another principle. The amount of principal together with the rate of interest cannot exceed double the principal, called damdupat. This principle is also recognised by some of the High Courts in peninsular India.
Unfortunately, even in Maharashtra, the principle applies only to crop loans given by co-operative banks. There is no limit on the interest that can accumulate on term loans or long-term credit for developmental purposes.
Primary co-operative credit societies circumvent this regulation by a farcical drama every year before the onset of the monsoons. Farmers who have not been able to repay the crop loans taken the previous year become ineligible for fresh loans. If the previous loan is carried over to the next year, the amount of interest, over a period, could exceed the original principal. This is not allowed to happen.
Some officials of the societies carry on money-lending businesses on the side. On paper, they lend the farmer an amount equivalent to what is due or what has to be paid to make him eligible to receive a fresh loan. The previous year's loan is, thus, `closed' and there is no question of accumulation of interest exceeding the principal. The principle of Damdupat is thus brought to a nought. It is said that most banks also charge farmer rates of interest that are higher than those prescribed. Further, they compound the interest by adding the amount of interest to the principal every quarter. Thus, the debts of farmers soon assume crushing proportions.
Why does the RBI or the Centre not take any punitive action against the defaulting banks?
The rub lies in Section 29A of the Banking Regulation Act which precludes courts from opening for scrutiny loan contracts merely on the groundthat the rate of interest is excessive; it is alleged that this provision was included by vested interests in the banking administration.
A farmer approaching a bank for loan is in dire need of money and, therefore, ready to sign on the dotted line without looking at the fine print of the agreement.
Once the agreement is signed and the loan extended, the farmer cannot go to a court of law to question the validity of the contract even if the terms are unreasonable and, therefore, voidable.
In the erstwhile State of Mysore, there existed a Usurious Loans Act, 1918 which permitted the courts to open contracts of farmers' loans to examine the reasonableness and fairness of the terms. A question was raised whether Section 29A overrides the provisions of the Usurious Loans Act 1918.
Obviously, the new Section cannot have overriding effect in its application to agriculture. It refers generally to `debtors'. Section 29A contains a provision similar to Article 31A and Schedule IX of the Constitution inasmuch as it denies farmers the right to approach the courts of law. In this context, the Maharashtra Government's latest move may be the first step to loosen the straitjacket that the farmer has been bound in for centuries.
(The author, Founder of the Shetkari Sanghatana, is a Rajya Sabha MP. He can be contacted at firstname.lastname@example.org)
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