Despite the loan waiver proposal for farmers, Jhe latter still face a shortage of agricultural credit Finance minister P. Chidambaram's has taken cynics and critics of his Rs60,000 crore farm loan waiver scheme head on. When he announced the proposal in his speech for the Union Budget for 2008-09, the requisite monies were not provided for in the budgeted numbers. A fortnight later, Chidambaram has announced the schedule of the financial re-provisioning of the banks and other institutions that have made the loans. The finance minister's scheme for farm loans has two key proposals. First, all 'marginal' and 'small' farmers will be provided with a complete waiver of all loans that were overdue from them on 31 December, 2007, by public lending institutions. A 'marginal' farmer is one whose land holding is up to one hectare (2.5 acres), while cultivators with individual holdings between one and two hectares (5 acres) are classified as 'small' farmers. Second, all other farmers have been offered a one-time settlement for all loans from public lending institutions that were overdue on the same date, with a rebate of 25 per cent against the repayment of 75 per cent of the outstanding amount. In his budget speech, the finance minister projected that the proposals would benefit about 30 million marginal and small farmers with a cumulative loan waiver amounting to Rs50,000 crore; and ots relief to another 10 million farmers amounting to another Rs10,000 crore. The proposal obviously has great economic as well as political significance. The Union agriculture ministry estimates that there are nearly 93 million farmers belonging to the small and marginal categories. The finance ministry, as well as key nodal agencies, has taken up the implementation of Chidambaram's proposals with speed. The Reserve Bank and nabard - the agency for refinance of agricultural credit - have asked the scheduled commercial banks, regional rural banks and cooperative credit institutions to give branch wise data on 'overdue accounts'. Subsequently, these outstanding loan-accounts are to be cleaned up and converted to debt free status by 30 June, enabling the beneficiaries to avail fresh credit from the lending institutions. Of course, the real question is making up for the loss suffered by the lenders. In order to kick start this process the finance ministry has announced that Rsl0,000 crore will be credited to the various lending institutions in 2007-08 itself, and another Rs25,000 crore by August this year. The ministry has announced subsequent instalments of Rs 15,000 crore in 2009-10, Rsl2,000 crore in 2010-11, and Rs8,000 crore in 2011-12. "You can see that this provisioning is entirely frontloaded as Rs25,000 crore are being provided in the current calendar year itself," says Chidambaram. The required monies will be funded by tax receipts and non-tax revenue like interest and dividends, non-debt capital receipts, and initial listing of central psus. The finance minister has estimated that the initial burden is 0.25 per cent of the gdp, which would decline each successive year; and be compliant with fiscal disciplinary targets of the Fiscal Responsibility and Budget Management Act. Referring to the overall cost of the farm loan waiver scheme at roughly $15 billion, Chidambaram states, "Surely a country with an annual economy of $1 trillion should be able to afford this with a little bit of effort and discipline." Welcome move The finance minister's proposal has raised the hackles of the political parties standing in opposition to the upa coalition government, with many economic experts accusing him of fiscal imprudence. However, there has been support from some key quarters too. Many of the public sector banks have welcomed the opportunity to write off a large number of bad loans; and bring in the financial provisioning made on this account onto their books. If this is added up with the corporate tax savings accruing due to the write-off, some of the lending banks might come with marginally better balance sheets. K.C. Chakravarty, chairman of the Punjab National Bank, therefore says, "The government's move will help the banks to reduce their non-performing assets and set up fresh credit and lending to farmers. It is good for the banks as well as for the farmers." A segment of the policy making establishment feels that the finance minister's scheme is workable on another count. There are strong indicators that the total lending by various public institutions to small and marginal farmers, is much less than the currently stated amount of Rs50,000 crore. According to Reserve Bank (rbi) data, the total non-performing loans of all commercial banks, regional rural banks, and cooperative banks, as well as non-banking financial companies amounted to Rs64,628 crore on 31 March, 2007. Again, total credit availed by small and marginal farmers on that date amounted to Rs23,500 crore, and not all of it was in the npa category. "There are valid grounds to anticipate that the bad debt accumulated in the name of the small and marginal farmers will actually turn out to be significantly less than what is being provisioned for," says another senior banker, working with a Delhi-headquartered financial institution. The case of the State Bank of India, India's largest public bank with the largest number of rural branches is typical. It has a total agricultural credit portfolio just over Rs34,800 crore, of which npa's involving small and marginal farmers are slightly less than Rs2,000 crore. Indeed, key functionaries of the Union ministries for finance and agriculture suspect that the final provisioning exercises might just end confirming a long-known fact of agriculture credit in India. Simply stated, small and marginal farmers are treated marginally by the overall system of institutional credit in India. This malady is a long term trend in the country's history of institutional credit, and was exacerbated by the decline of rural credit (and agricultural credit in particular) during the 1990s. When the upa coalition formed the Central government in 2004, it announced a commitment to raise agricultural credit by 30 per cent every year, and to initiate a range of debt-relief measures. Government outlays show that it has worked towards that commitment since then in an overall way; but relatively little benefit to small and marginal farmers. Indeed a key trend is that increasingly lower amounts of agriculture credit are being directly availed by farmers. This issue has been jointly examined by economists R. Ramaku-mar and Pallavi Chavan, in an illuminating study, pointing to the growing share of 'indirect finance' in the overall agricultural credit offered by the public sector lending institutions. 'Indirect finance' in agriculture refers to loans which do not go directly to cultivators; but are availed by institutions that have a 'supporting' or 'facilitating' role in the rural and agricultural economy. In contrast 'direct finance' refers to loans availed by farmers themselves. Ramakumar and Chavan point out that over the decades, the Reserve Bank and other nodal agencies have been increasingly permissive about the role and scope of 'indirect' finance in quantifying overall agricultural credit. Credit terms Up to 1993, only 'direct finance' lending was included in the definition of agricultural credit. Thereafter, 'indirect finance' has been included in increasing doses. Loans availed by dealers in agricultural and irrigation machinery are a case in point. For a long time, these dealers had to be located in rural or 'semi-urban' areas to avail low-cost agriculture credit. Now they are treated as eligible for agricultural credit, regardless of wherever they are located. From May 2004, all lending to storage units (including cold storages) are treated in the same category, regardless of the location. Again, loans extended to state electricity boards for providing requisite connectivity with the electricity grid to farmers are treated as 'indirect finances' in agriculture. From 2005 onwards, loans given to private power distribution companies operating in rural areas are treated as 'indirect finance' too. From April 2007 onwards, two-thirds of any loan above Rsl crore availed by any corporate entity (or a partnership firm) for agricultural and allied activities is treated in this category as well. "These developments have made it easier for commercial banks, and other agencies, to include lending that was traditionally classified under other heads, in the category of agricultural credit; and thereby satisfy their priority sector targets," says the banker from the Delhi-based bank. The growing share of 'indirect finance' in overall agricultural credit - from 13 per cent in 1993 to nearly 28 per cent today - supports his argument. The second key trend in recent agricultural credit is almost a corollary of the growth of 'indirect finance' is the growth in the number of large-sized loans. Reserve Bank data shows that agricultural loans amounting to Rs25,000 and less have fallen from 35.2 per cent of overall credit to 13.3 per cent, during the period 2000-06. The share of loans between Rs25,000 to Rs2 lakh has also declined marginally - from 32.4 per cent to 31.4 per cent - during the same period. However, the share of larger loans has increased dramatically. Thus, loans ranging between RslO crore to Rs25 crore have increased from 1.7 per cent to 4.3 per cent of overall agricultural credit during the same period. The third key trend relates to 'direct finance' availed by the cultivators. This too points to the increasing mar-ginalisation of small and marginal farmers in the credit system. In keeping with the overall direction of their farm-related lending, banks and other institutions are directing greater amounts of credit to the big cultivators. Thus, Ramakumar and Chavan have collated data to show that the share of 'direct finance' to farm borrowers whose credit limit is less than Rs25,000, has declined from 41.1 per cent of total agricultural credit to 18.1 per cent, during the period 2000-06. In contrast there has been very significant increase in the number of direct loans, in cases where the sanctioned limit is Rsl crore and more. The reversal of these trends is the real challenge before providers of agricultural credit and the finance minister.