What is common between Santosh Khope, Kishan Jadhav, Shirirang Dolarkar, Vinod Vaghare, Nanji Wadhari and many thousand others? Well, they are all dead. They paid a heavy price for being a farmer in India. The reason for their untimely death is not hard to comprehend. They committed suicide. Crop failure, debt burden and penury forced them to take their own lives.
Agriculture in India is in a bad state of affairs growing at less than 3% per annum over the last decade. Vagaries of weather and bad government policies have only accentuated the trend. While not much can be done with the weather; a lot can be done with the policies of the government. High cost of production, insufficient minimum support prices, lack of sustained access to institutional source of credit, high cost of borrowing from money lenders have only added fuel to the fire.
Banks debar farmers who are unable to repay their loans. On the face of it, this might seem to be a desirable things for the sake of efficiency of banks but this practice is inherently counter cyclical. Farmers who are in desperate need of money borrow from banks to fund their agricultural activities. Now suppose that the farmer has a bad year because of crop failure and is unable to repay the loan. He thus becomes ineligible for another round of loans. But the farmer needs the money to fund next year's agricultural activities. So what does he do? He borrows from private money lenders who charge extremely high interest rates. To repay this huge interest burden the farmer must have atleast a few years of good crops. But the irony is, a farmer can not have a few years of good crops because every year is not a good rainfall year. So the farmer struggles to repay the private loan. Eventually the situation becomes unsustainable and he he commits suicide. Well to stretch the argument further he not only kills himself but indirectly his family also as very often the farmer is the prime bread earner for the family. After his death survival of the family becomes all that more difficult.
The moral of the story is that people who need the money the most are denied money. The way out would be for banks to persist for a longer period of time with the farmer. This will give the farmer a fair chance to repay the loan and it also increases the chances of the bank getting its principal back (because even if the farmer has a decent year he will be able to repay the loan). Besides the banks will be fulfilling their duty of spreading equitable growth. The only institutions that will be able to do this will be banks because they have deep pockets and will be able to stay on the loans longer.
Come to think of it the aforementioned things are not so hard to implement. I only wonder why they have not been implemented yet?
Agriculture in India is in a bad state of affairs growing at less than 3% per annum over the last decade. Vagaries of weather and bad government policies have only accentuated the trend. While not much can be done with the weather; a lot can be done with the policies of the government. High cost of production, insufficient minimum support prices, lack of sustained access to institutional source of credit, high cost of borrowing from money lenders have only added fuel to the fire.
Banks debar farmers who are unable to repay their loans. On the face of it, this might seem to be a desirable things for the sake of efficiency of banks but this practice is inherently counter cyclical. Farmers who are in desperate need of money borrow from banks to fund their agricultural activities. Now suppose that the farmer has a bad year because of crop failure and is unable to repay the loan. He thus becomes ineligible for another round of loans. But the farmer needs the money to fund next year's agricultural activities. So what does he do? He borrows from private money lenders who charge extremely high interest rates. To repay this huge interest burden the farmer must have atleast a few years of good crops. But the irony is, a farmer can not have a few years of good crops because every year is not a good rainfall year. So the farmer struggles to repay the private loan. Eventually the situation becomes unsustainable and he he commits suicide. Well to stretch the argument further he not only kills himself but indirectly his family also as very often the farmer is the prime bread earner for the family. After his death survival of the family becomes all that more difficult.
The moral of the story is that people who need the money the most are denied money. The way out would be for banks to persist for a longer period of time with the farmer. This will give the farmer a fair chance to repay the loan and it also increases the chances of the bank getting its principal back (because even if the farmer has a decent year he will be able to repay the loan). Besides the banks will be fulfilling their duty of spreading equitable growth. The only institutions that will be able to do this will be banks because they have deep pockets and will be able to stay on the loans longer.
Come to think of it the aforementioned things are not so hard to implement. I only wonder why they have not been implemented yet?
4 comments:
dont u think this is going to encourage the farmers to default on their loans time and again?
@ Somya: What you have mentioned will remain a concern. However, this is why I think that farmers will not be encouraged to default on loans.
A farmer gets a fair chance to repay the loan failing which he will be debarred from taking loans from the banks and will have to borrow at high rates from the private money lenders. So a farmer will definetely substitute the expensive private loans with the cheaper bank loan. Therefore, it is in the farmer's interest to repay the laon if he has the money.
Hmm...so a financial economist does possess the ability to simplify the root cause of the matter. Following what Somya and you are discussing, it would be interesting to look up studies that focus on the willingness of the poor to repay loans in the context of micro finance (a lil deviant from the farmer's context but yet relevant). Mostly people studying behavioural economics Senthil and Abhijeet Banerjee.
@ Revati:
That should make an interesting read. My initial feeling is that given that the farmer has a normal/good year he will repay the loan? Not paying the loan pushes him out of the formal credit framework. In that case he has to borrow at exorbidant rates from the priavte lenders.
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