How to do Farm Loan Waivers Right
A few months ago, we were involved in a farm loan waiver process. This gave us incredible insight into the processes and the landscape of the financial system around agriculture and the government.
The learning is very important to share, specially in a time when farmer distress is very high and every other political party is talking about waiving farmer loans.
Why Loan Waivers?
India is a country with millions of small farmers who depend on agriculture for their livelihood. Farmers don’t have savings and are dependent on loans to buy seeds, fertilizers, transport and labour for their produce. Irrigation in India in many regions is mostly rain-fed and farmers have to depend on a good rainfall, which is highly variable for irrigation. On top of it, prices are also variable depending on the scarcity and quality of the product. So it is an extremely uncertain business.
On the other hand, the government is forced to keep food prices artificially low since a lot of people in India are extremely poor, and increasing food price will lead to a lot of hardship and distress. So in this situation, loan waivers are a way of subsidizing food for the rest of the country. But governments can’t waive loans very often, as it will lead to profligacy and entitlement.
State of Rural Banking
The state of banking in rural India is extremely basic. In a very large number of cases, the process of applying, tracking and maintaining loan information is still done on paper. This is true even for large nationalized banks. For banks, it is important to note that their core banking system does not have data about its branches, so any scheme must acknowledge that each branch is an individual unit, not the bank.
The condition of small co-operative banks is even worse. They do not have proper systems to track customers, or loans. The lack of a unique identity system is a big hindrance in identifying the end customer. Also loans are often taken by small village level co-operatives which do not even have proper systems on paper.
Any loan waiver scheme needs to appreciate this state of systems.
How to Design A Loan Waiver?
Coming to the main topic, under such state of systems, how does a government design a system to effectively waive farmer loans?
1. Design Rules of the Scheme Considering State of Data
The rules of the any scheme must be simple enough in way that it acknowledges the limitations of the state of data. A very complex scheme excluding a certain section of people from applying for loans will not work because it is very hard to verify individual recipients.
Any scheme must only consider the individual and not the family. It is very hard from the current state of data to identify families of waiver applicants.
It is also important to accept the fact that there will be certain wastage in the scheme and some non deserving candidates will also get the loans. The cost of excluding such individuals will be higher than the benefit gained from saving this amount.
2. Collect Loan Data from Banks and Co-operatives
The first step of any process should be to collect data from banks and co-operatives.
- The government must carefully compile a list of all banks, branches and co-operatives operating in the state. Note that each rural branch must be considered as an end user, not the bank.
- Design a portal where each co-operative and branch can upload the information of all loans they have. This data must have the name of the person, details of the loan (type of loan, date of disbursement, amount of loan), mobile number, personal identification number (if allowed by privacy law). and this data must be attached to the branch.
- The data upload must be 2-step: upload and verify. The branch and co-operative must be given an interface to independent edit, delete and review this loan information. Then the branch or co-operative must mark the data as “verified”.
- The system must generate a Unique Loan Id for each verified loan by the branch or co-operative.
- There must be an assumption that the person operating this system may not be very comfortable with technology. So there must be training videos prepared for this.
- Branches /co-operatives must be given 4–6 weeks to complete this process.
2. Let farmers apply for loans via a web-portal with 2-factor authentication
Once more than 60–70% of the branches and co-operatives have uploaded the data, the web portal should be opened to farmers for application.
The goal of making farmers apply are two fold:
- Ensure that no eligible farmer is left behind due to the bank or co-operative not submitting correct information.
- Ensure that only farmers with real accounts get the benefit of the waiver, and not bogus accounts.
To apply the farmer must contact their branch or co-operative for the Unique Loan Id generated for the scheme. In this process, if the branch has not uploaded the farmer data, they will have to immediately upload and verify it.
The farmer can then apply for the loan via the web-portal using an One Time Password that is either sent via SMS to the farmer or sent to the nearest post office (or alternate authentication mechanism). Since mobile phone penetration is near complete, this is easily the best way to rule out bogus applications.
The web portal should also have a way to file for grievance in case the branch or co-operative does not provide the information on time to the farmer and there must be a team assigned to follow up with the bank and get into the root cause of such a problem.
3. Banks Must Upload Disbursement Data for Verification
Just by creating a matching application, the job is not complete. The next step is ensuring that the bank transfers the amount to the farmer. After the bank verifies the disbursement, the system must generate an SMS that is again sent to the farmer for verification along with a letter. This will ensure that the bank also completes its job of writing off the full / partial loan amount.
Also often there could be reverse, faulty transactions so the system must also maintain a double accounting ledger, first accruing the loan amount when the farmer applies and then updating the payment when the bank makes the payment, or the payment is cancelled or revised.
This ledger system will also be very useful in auditing of the system.
National Loan Registry
While loan waivers make help in solving immediate distress, but is not a long term solution. Loan waivers generally apply to farmers in all regions of a state, irrespective of whether their region is in distress or not. This system is also unfair to farmers who have been making wise decisions.
Since farmer distress is such a major problem in the country, it makes sense to build a national loan registry that collects loan information from farmers every quarter. In this way, banks will be forced to maintain better systems and also the government can run analytics on what regions / type of crops are in distress and can take localized action.
This will not only ensure that the people who need help will get it in time and also ensure that it is lighter on the exchequer.
Conclusion
From my personal experience, governments are not prepared in terms of systems to address the farmer distress problem. The action is usually ad-hoc and driven by political survival not any genuine attempt to understand or fix the problem.
In all my interactions with various government officials, political leaders, bank officials, top consulting firms, technical architects there was distinct lack of deep thought. The schemes had been designed with a lot of assumptions, rather than experience and the execution had been given to companies that have no capability of executing such systems. The big consulting firms too have very little “skin in the game” to be able to offer correct advice.
Unless the purpose of any such system is not clearly defined. There will always be an ad-hoc approach, unfairness and massive wastage of public resources.
