Loan politics

When, in February 2008, the first United Progressive Alliance (UPA) government announced a more than `70,000 crores farm loan waiver scheme, it was hailed as a path-breaking move that would go a long way towards alleviating an important problem afflicting Indian agriculture, that is, rural indebtedness. What is more, the decision to writeoff bank loans

given for agriculture was perceived as a masterstroke on the part of the political leadership that helped it return to power with a stronger mandate from voters in the April-May 1999 Lok Sabha elections.
At the time the loan waiver scheme was announced, the government’s critics complained that the decision would discourage honest borrowers from repaying their loans in the future in the hope that there would be more loan waiver schemes, a phenomenon that is somewhat esoterically described as a “moral hazard”. The loan waiver scheme was also criticised on the ground that its benefits would accrue mainly to the relatively well-off sections of the farming community and not to small and marginal farmers, nor to landless agricultural workers, who do not borrow from banks but tend to be indebted to local moneylenders or mahajans who disburse loans quickly without paperwork but also charge borrowers usurious rates of interest that make them fall into a debt trap.
It now transpires that there is a huge scam behind the farm loan waiver scheme and also on account of the more recently announced concessional interest rate and interest rate subvention schemes on agricultural loans. The scandal does not pertain to a few unscrupulous individuals nor is it a case of a small section of smart borrowers exploiting loopholes in the system. There is growing evidence to indicate that the scandal is a gigantic one and that the amounts involved are substantial. All of which calls for a detailed inquiry.
Facts about the geographical dispersion of agricultural loans are startling, to say the least. Two small parts of the country, the national capital of Delhi and the Union territory of Chandigarh, had hogged the lion’s share of inexpensive farm loans during the financial year 2009-10. Borrowers in Delhi and Chandigarh had obtained agricultural loans worth more than `32,000 crores that year, although there is hardly any farm land in these two urban areas. The scale of the scam becomes evident when one realises that in the same year, a smaller amount of money was borrowed in the four states of Uttar Pradesh, Bihar, West Bengal and Jharkhand. These four states received concessional agricultural loans worth less than `31,000 crores that year.
The politics of the scheme is apparent. The highest disbursement of farm loans in 2009-10 was to Tamil Nadu (then ruled by the coalition of Dravida Munnetra Kazhagam and the Congress) amounting to `41,100 crores. Two Congress-ruled states, Andhra Pradesh and Maharashtra, together received concessional loans worth `61,000 crores that year. More than half (52 per cent) of the farm loans disbursed in 2009-10 went to six states or Union territories that were ruled by the Congress or the UPA. These were Andhra Pradesh, Maharashtra, Delhi, Haryana, Tamil Nadu and Chandigarh.
Between 2007-08 and 2010-11, Delhi received loans in excess of `57,000 crores while the figure for Tamil Nadu was `61,000 crores. Maharashtra and Andhra Pradesh together received a total of `15,400 crores worth of loans in these three years. The total budgetary allocation for subsidised agricultural loans has jumped in the recent past: from `86,000 crores in 2004-05 to a budgeted `4,75,000 crores during the current financial year.
The story does not end here. In February this year, finance minister Pranab Mukherjee reduced the effective rate of interest on farm loans to four per cent per year. How did this happen?
The rate of interest on short-term agricultural loans of up to `3 lakhs had stood at seven per cent but what the finance minister did in his Budget for the current year is to announce an interest rate subvention of three per cent to those who repaid their loans on time. Thus, the effective interest rate came down to four per cent.
What happens thereafter is that after obtaining a loan at an annual interest rate of four per cent, the concerned “farmer” does not use the money for agricultural purposes. Instead, the funds are parked in various fixed deposit schemes of banks that earn the depositor annual interest rates ranging between seven per cent and 8.5 per cent.
In other words, by illegally diverting agricultural loans, the so-called farmer earns an annual interest income varying between three per cent and 4.5 per cent for doing next to nothing, by exercising what in technical parlance is called an “arbitrage opportunity”.
Banks are keen on meeting their “priority sector” lending targets stipulated by the Reserve Bank of India (RBI) and often fail to ensure due diligence in seeing that the funds loaned at low rates of interest are being used for the purpose these have been disbursed, namely, for agriculture. In certain parts of India, banks easily extend agricultural loans at concessional interest rates against deposits of gold jewellery. Working in collusion with corrupt individuals, the loans meant for farming end up financing various other commercial and business activities, including real estate development.
It is not as if the managements of banks, the RBI and the ministry of finance are not aware of these malpractices that have become widespread over the last few years. This is hardly the first time the corruption in the manner in which farm loans are being disbursed is being discussed in the print media. But the authorities do not seem to have taken action against those responsible for perpetrating this scandal.
In this season of corruption, is the government waiting for one more major scam to blow up in its face?

Paranjoy Guha Thakurta is an educator and commentator