VR Logo

Another Scam In The Making

The misuse of loans specifically meant for agricultural loans is not exactly a secret…

In this season of scams, here’s one more. The Ministry of Finance is understood to be aware of the manner in which concessional loans disbursed for the purposes of agriculture are being misutilised for making a quick buck through arbitrage. Banks have reportedly been asked to ensure that those who receive agricultural loans at low rates of interest use the funds for farming only – but systems are not in place to ensure that large-scale diversion of money is checked.

In this year’s budget, Finance Minister (FM) Pranab Mukherjee reduced the effective annual rate of interest on farm loans to 4 per cent per year. The rate of interest on short-term agricultural loans of up to Rs3 lakh had earlier stood at 7 per cent. What the FM did in his Budget proposals was to provide for an interest rate subvention of 3 per cent to farmers who repaid their loans on time thereby bringing down the effective interest rate to 4 per cent a year.

What is happening is that so-called farmers who obtain loans at an interest rate of 4 per cent do not use the funds for agriculture but instead park the money in various fixed deposit schemes of banks that earn the depositor interest rates varying between 7 per cent and 8.5 per cent per annum. In other words, by illegally diverting funds loaned specifically for agriculture, the borrower earns an annual interest income varying between 3 per cent and 4.5 per cent.

Banks are keen on meeting their “priority sector” lending targets that have been stipulated by the Reserve Bank of India (RBI). In the process, due diligence is often not exercised thereby allowing funds loaned at low rates of interest to be used for purposes other than agriculture. Thus, loans meant for farming end up financing various other commercial and business activities, including real estate development.

The story has another dimension which is revealed by statistics compiled by government authorities. Delhi and Chandigarh accounted for huge disbursals of inexpensive farm loans during 2009-10 although there is very little agricultural land in these two highly-urbanised parts of the country. Borrowers in Delhi and Chandigarh had obtained agricultural loans worth more than Rs32,000 crore that year, which was more than the total amount borrowed in the four states of Uttar Pradesh, Bihar, West Bengal and Jharkhand, which together received agricultural loans worth less than Rs31,000 crore during that year.

There is another interesting aspect to the geographical dispersion of farm loans. The biggest beneficiary of farm loans in 2009-10 was Tamil Nadu (then ruled by the DMK-Congress coalition) amounting to Rs41,100 crore. Two Congress-ruled states, Andhra Pradesh and Maharashtra, together received concessional loans worth Rs61,000 crore that year. More than half (52%) of the farm loans disbursed in 2009-10 went to six states and one Union territory ruled by the Congress or the UPA: Andhra Pradesh, Maharashtra, Delhi, Haryana, Tamil Nadu and Chandigarh.

The likely scale of the scam may be gauged from the fact that the Union government has budgeted for a disbursement of subsidized agricultural loans to the tune of Rs4,75,000 crore during the current financial year, 5.5x that amount disbursed seven years ago. If one assumes that a fifth of the total farm loans that are expected to be disbursed this fiscal year is misutilised or diverted for non-agricultural purposes, the figure would work out to a massive Rs95,000 crore.

This scam is not exactly a secret. Those in the top managements of banks, the RBI and the Ministry of Finance are aware that this malpractice is widespread. Prominent newspapers have written articles on this subject. The Times of India, for instance, carried articles by Pradeep Thakur titled “Delhi among leaders in cheap farm loans” (April 13, 2011) and “Money plant: Clever farmers borrow at 4%, invest at 8.5%” by Mayur Shetty (June 1, 2011).

This is the same government that had, in February 2008, implemented a more than Rs70,000-crore farm loan waiver scheme and was re-elected to power in May the following year. The government should act fast if it is serious about convincing people that it wants to curb corruption.