Farm loans may be crop loans or investment loans that are taken to buy equipment for agriculture. Both banks and farmers reap a good harvest when all is well but when there is natural calamity or a below normal monsoon; farmers may be unable to repay loans.
The rural distress in such situations often prompts States or the Centre to offer complete waiver of loans or partial loans waivers. For example, in 2008, crop loans and investment loans were waived for marginal and small farmers those with under 2 hectares of land ownership); other farmers were just given a 25 percent reduction and at that time Madras High Court has directed Tamil Nadu to offer a full waiver to all farmers in Tamil Nadu.
The Central or State government take over the liability of farmers and repay the dues to banks. Waivers are usually selective, only certain loan types such as crop loans or investment loans. Farm loans may be crop loans or even investment loans used to buy seeds, fertilizers, irrigation equipment and others. In recent times, it seems that farm loan waivers tend to add disposable income in the hands of farmers which flows into increased consumption.
The political parties in the country are moving towards farm-loan waivers as a tool to win elections. Sometimes, farm loan waivers are utilized as an easy way to deliver mass relief to farmers just before key elections. Rajasthan, Chhattisgarh and Madhya Pradesh are three states that have announced farm loan waivers recently. These states account for about 21 per cent of tractor demand in India and the farm loan waiver is expected to benefit farm equipment companies such as Mahindra & Mahindra (M&M), Escorts, and TAFE.
In 2008, the UPA government wrote off farm loans worth Rs 50,000 cr and this contributed to the party romping back into power. After this, tractor volumes saw a sizeable pickup in year ending March 2009 and March 2010. Agricultural product prices during the same period remained bullish. Recently, we have seen massive loan waivers offered in states such as Uttar Pradesh, Telangana and Karnataka. These waivers were part of pre-poll promises which the parties were bound to deliver. The nationwide farm-loan waiver, which was declared in 2008, joined with other stimulus measures, had helped tractor demand growth in FY09 and FY10. In 2008, after the government waived off farm loans, tractor volume grew at an annualized rate of 21 per cent for the next three years. The large ones were implemented in Andhra Pradesh and Maharashtra, and all of them have boosted tractor demands in the year when implemented.
CLSA, estimated that the total farm loan write-offs by the time of the central elections in 2019 could cross USD $30 billion (approximately Rs 2 lakh crore). The entire burden will be on the state government budgets and not on the banks. Analysts expect that a fair share of the savings could be channelized to buy farm equipment.
Mahindra & Mahindra (M&M), India's largest tractor manufacturer, is likely to benefit the most from incremental tractor volume growth. M&M's operating margin for tractors are nearly double of the automotive business, which means higher volume growth of tractor is not only positive for revenue growth but is also margin accretive.