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- Limited impact on productivity – There is insufficient evidence that blanket loans waivers such as this, have an impact on agricultural productivity. Evidence from NSSO suggests that nearly 40% of the loan amount is used on non-agriculture purposes such as marriages, education, health etc (LOAN WAIVER SCHEME AND INDIAN AGRICULTURE, 2008). Subsidies for specific inputs such as seeds, fertilizers based on specific regional needs might be more effective than loans that are not attached to any specific use.
- Credit alone is not enough – Evidence indicates that “foodgrains growth fell from 2.85 per cent in the 1980s (1980-81 to 1990-91) to 1.16 percent in the 1990s (1990-91 to 2003-04), which was lower than the rate of growth of population of 1.9 per cent during this period” (Report of the Expert Group on Agricultural Indebtedness, 2007). While the economy itself may have shifted to a more service based economy and away from agriculture, the agricultural sector has benefited little from technological advancements. There has been little improvement in agricultural infrastructure (such as irrigation systems) or market linkages, and the wide spread corruption in Indian politics hasn’t helped.
- Burden on Banks – The scheme does not help the banks either, because they forced to lend to both viable and unviable clients using the same lending parameters. In addition, banks have to write off bad loans, which are expensive not only for the banks, but also the government. It is estimated that in 2010-2011, nearly 73% of Priority Sector Lending resulted in bad loans, and nearly 44% of these loans were in the agricultural sector (The big problem of agricultural loans, livemint.com, 2008).
- Informal lending un-addressed – Most farmers take loans either from the bank or the moneylenders for agricultural purposes (LOAN WAIVER SCHEME AND INDIAN AGRICULTURE, 2008). This scheme does not address loans taken from informal sources. In addition, there were farmers who took on expensive loans from the informal sector (moneylenders) to pay off their agricultural debt. They were not rewarded under this scheme, and it may seem that farmers were penalized for returning the debt on time.
- Misclassification of credit need – Classification of marginal, small and other farmers is inadequate. According to MS Swaminathan, small farmers (less than a hectare) may be able to manage their irrigation needs better than farmers with medium sized land (4-5 hectares), who might have to largely depend on monsoon for irrigation. However, the scheme seems somewhat regressive in that it does not provide enough support for farmers with over 2.5 hectares of land. The size of the land in itself might not be a robust indicator of credit worthiness or credit need.
- Insufficient monitoring and evaluation – The scheme requires the lending institutions (commercial and public) to appoint a Grievance Redressal Officer in each State. However, it is unclear how RBI wanted to monitor the loan usage and grievance issues. Also, there was insufficient monitoring and evaluation to determine whether the scheme worked or not.