Telangana's Proposal to Waive Loans of Tenant Farmers May Uplift Poor But at Cost of Banks

New Delhi: Telangana government is considering offering its tenant farmers the benefit of loan waivers. But will this raise the stress on the banking system as the quantum of debt relief increases, or will it actually mitigate agricultural distress?

The state is reportedly moving to implement the Model Agricultural Land Leasing Act, which will enable tenant farmers to access crop loans and insurance and reap the benefits of loan forgiveness. Tenant farmers are small and marginal farmers who take land on lease from bigger landlords and till it. Since the ownership of the land remains with the big landlords the tenant farmers cannot access bank credit or any other form of institutional finance.

The move comes in the backdrop of an increase in tenant farming nationwide, led by Andhra Pradesh and Telangana. Increasingly, farmers who own land prefer to leave the actual tilling to tenants and migrate to cities. Estimates put the number of tenant farmers nationally at 20%, while in some states like Andhra Pradesh, it is at 30%.

“Land owners started moving to the cities or abroad, but didn’t relinquish ownership of the land. They instead got poor and marginal farmers in their villages to till their land for a pittance,” G.V. Ramanjaneyulu, executive director of the Hyderabad-based Centre for Sustainable Agriculture told News18.

In 2011 Andhra Pradesh came up with a law where tenant farmers could apply for a loan eligibility card and borrow money from banks. However, this scheme failed to take off subsequently in both the Telugu states, with reportedly only 10% of tenant farmers getting loans. Why is this important? Because tenant farmers turn to money lenders for their cash needs and the greatest farmer distress and a majority of farmer suicides are from this class.

Further, Telangana government conducted a survey recently to find out the details of agricultural land ownership. Chief Minister K Chandrasekhar Rao has promised Rs 4,000 per season, per acre as a subsidy to purchase agricultural inputs like seeds, fertilizer, pesticide etc. However, the government wants to ensure that absentee landlords do not corner all the money and that even cultivators who actually till the land get some access.

Other states are also working on implementing their own version of the Land Leasing Act and it is being watched with interest by the banking sector. The quantum of farm loan waivers announced by states has recently reached Rs 1 lakh crore and there is concern about how it will affect both the balance sheet of the banks’ – already stressed with high amounts of non-performing assets – and state finances.

The Economic Survey - Volume 2, which was released last week, estimated the collective impact of the current round of farm loan waivers – announced by UP, Maharashtra, Karnataka and Punjab – to be around 0.7% of GDP. And these waivers are only on money borrowed from banks. Add tenants to the mix, and no wonder the banking sector is worried.

However, Ramanjaneyulu doesn’t think farm loan waivers are the solution. “Unless you make agriculture remunerative farm loan waivers won’t solve the problem of farm distress. In any case, they are a short term solution,” he said.

In Telangana nearly 25% of crop loans are given in Hyderabad! Which means that rich farmers who have settled in the state capital accessing loans rather than the actual tillers, who are forced to borrow from private money lenders at high interest rates. Less than 40% of farmers have access to bank credit.

Unless the structural problems in agriculture are solved, both farmers and banks will remain stressed.