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Friday, July 21, 2017

Implementing loan waivers: Lessons from the 2008 All India Debt Waiver Scheme experience

by Renuka Sane and Amey Sapre.

This has been the season of farm loan waiver announcements. Starting with Uttar Pradesh, state governments of Maharashtra, Madhya Pradesh, Punjab and Karnataka have made similar announcements. Details regarding eligibility criteria for the loan waivers, and the delivery mechanisms have yet to emerge. The estimated fiscal burden of these schemes is likely to be INR 2 Lakh Crore, or close to 2% of GDP by 2019. These numbers have led to concerns regarding further deterioration of already weak state government finances, as well as the adverse impact on credit culture. Loan waivers have primarily been criticised as a bad policy decision.

In this article, we explore a less discussed aspect, that of implementation. Towards this end, we summarise key findings of the audit reports of the 2008 All India Debt Waiver Scheme. Past experience suggests that the ability of public administration in India to deliver the intended benefits is limited.

The audits of The All India Debt Waiver Scheme, 2008

The All India Agricultural Debt Waiver and Debt Relief Scheme was launched in February, 2008. The scheme was aimed at providing relief to farmers through a complete debt waiver to small and marginal farmers, and a partial relief to other farmers. The guidelines on the implementation of the scheme were issued by the Department of Financial Services (DFS) and also covered the details of the scheme such as eligibility conditions, categorisation of beneficiaries, cutoff dates for eligible amount, types of loans and the implementation structure to be followed by lending agencies.

Post implementation, the scheme was audited by the Comptroller and Auditor General of India and a report was presented to the Public Accounts Committee (PAC) of the Lok Sabha in March 2013. Based on the findings of the audit report and evidence from the DFS, the PAC submitted its report in January, 2014.

Audit findings

The CAG report pointed numerous irregularities in implementation and concluded that the scheme did not achieve its intended objectives. Irregularities in identification of beneficiaries and a cavalier approach of the nodal agencies led to the failure of the scheme. The audit was conducted in 715 bank branches covering over 90,000 accounts spread over 25 states. There were three main problems.

  1. Identification of beneficiaries: Errors in inclusion and exclusion of beneficiaries was one of the major problem in successful implementation of the 2008 loan waiver scheme. As per the audit report, inclusion of in-eligible beneficiaries and excess benefits given due to errors in identification costed nearly INR 270 crores. The Public Accounts Committee noted in its report that due to administrative indiscipline of the nodal agencies, errors in identification of beneficiaries led to problems of over payment, non-extension of benefits to eligible farmers and funds lying idle with banks. The problem was complicated further as reimbursements were given to several micro-finance institutions in violation of the guidelines of the scheme.

  2. Lack of proper documentation: For successful identification, banks were required to prepare lists of farmers eligible for loan waivers and partial relief. However, the audit report revealed that lists were prepared in a cavalier manner leading to major financial lapses in the scheme. In almost 32% of cases, nodal agencies were unable to obtain an acknowledgment from the beneficiaries on the issuance of loan waiver certificates.

  3. Lack of monitoring: The Public Accounts Committee (PAC) after taking evidence from the audits and representatives of the nodal agencies concluded that lack of monitoring and administrative indiscipline resulted in bad implementation of the scheme. In nearly 2800 cases, there was evidence of tampering of records, manipulations and forging of documents to claim benefits. Based on the CAG's audit report, the PAC ordered a re-examination of the claims in December 2012 and initiated disciplinary action against officials of nodal agencies and lending institutions. Cases were also filed against banks and recovery proceedings were initiated against NABARD and other lending institutions. In its report, the PAC states that disciplinary action was taken in over 5400 cases, and nearly 600 crores were recovered on account of financial lapses.


The findings of the audit suggest that any loan waiver scheme is likely to face at least three administrative challenges - a) of identifying and reaching beneficiaries; (b) verifying eligibility and subsequently receipts; (c) coordinating across budgets, treasuries and payment channels. State loan waivers might get more complicated as banks are not even subject to state government control, unlike the 2008 waiver which was a central government initiative. It is unclear what role (if any) the DFS will play in monitoring the banks. In addition, the audit of such schemes is time consuming, and additional resources will have to be spent on cleaning up the mess they create.

Against this background, it is useful to ask if this is the most optimal use of tax-payer funds. Leaving aside questions of credit culture, in the best of circumstances, every rupee of benefit to the farmers from the waiver, should not cost tax-payers more than a rupee. Put differently, when the government spends INR 2 lakh crore on farm waivers, the opportunity cost is the Rs.2 lakh crore plus the welfare cost in acquiring the funds. In the public finance literature, this is known as the Marginal Cost of Public Funds (MCPF). In India, the MCPF is expected to be very high. As an example, healthcare spending in India has been found to be highly inefficient. The leakages demonstrated in the 2008 debt waiver indicate that inefficiencies in administration will lead to the state waiver programs doing worse. The costs of loan waivers will outweigh the potential benefits.


Renuka Sane is a researcher at the National Institute of Public Finance and Policy. Amey Sapre is a PhD student at IIT Kanpur.


  1. is the waiver only for impaired loans or for all loans including performing?

  2. Using a logic of operational inefficiency against a populist economic decision add a sense of credibility to the populist decision. The impression produced by this blog is that there is not much wrong about mass loan waiver except for the operational inefficiency of the government machinery.

    Hence, the direct prima-facia message from the blog is to encourage such populist measure with improvement in the government operational inefficiency. The other message appears to be a world of benevolent politician but with corrupt government machinery.

    The emphasis should be articulated around economic logic of mass loan waiver with primary emphasis on loss in credict discpline in the context of current Indian banking crisis.


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