Loan-waiver or one-time settlement for the farm sector is not something new or a unique step taken for the farm sector in this year's Central budget. India is known for going soft on defaulters in other sectors too. There is precedence of one-time settlement (OTS) for small industries and even allowing tax evaders to turn their black money into white without penalties. Loans in the farm sector, too, were waived up to Rs 10,000 across the board during the Chandra Shekhar-Devi Lal regime. Principally, such waivers spoil the credit culture that favours the defaulters, more so wilful defaulters, and punishes the law-abiding borrowers, who retire their obligations in time. The existing level of non-performing assets (NPAs) of institutional lenders (banks and cooperatives) is partly a fallout of the earlier waiver also. OTS is an individual-based settlement, depending upon the assessed ability of the borrower to repay the loan, and it varies from person to person. Waiving of a certain percentage of the outstanding loans across the board is a financially bad policy and waiving the over-dues or outstandings totally is worse. These steps may sound populist and the decision-makers may entertain the hope of creating vote-banks, yet they help more the undeserving and frustrate the non-defaulters that are in majority, the political fallout of which may turn out to be rather negative. It is worth noting that none of the expert committees appointed by the government or the Reserve Bank of India or any expert ever recommended the waivers across the board. Recommendations have been on rewriting the loans and interest waivers mainly. The waivers, wherever recommended, have been recommended on an individual basis in cases of extreme distress only, as a liability of the government. Assuming that the decision on loan-waivers and OTS emerge out of genuine concern of the government on the plight of the farmers, there are some issues that need clarification. First, how to define one or two hectare land-holding. Is it irrigated or unirrigated land? Is it one-crop or two-crop land? Is there some scheme to standardise the acre/hectare? Or, is it the land size which is pledged as collateral with the bank? It is a difficult task and involves lot of arbitrariness. Left to individuals, it will generate vagueness and lead to frustration among the beneficiaries. Second, why the limit on two hectares? A fraction of a hectare higher does not make the borrower solvent or better placed in respect of the repaying capacity. From this angle, the earlier waiver of Rs 10,000 for all the farmers was a better approach that left no vagueness in the system of relief. Third, is the waiver applicable to crop loans only or does it cover medium-term loans also? Some of the farmers who got tractor loans sold their new tractors in the market at lower prices and some of them encashed their loan at showrooms even. Do such defaulters deserve waivers? The loan-waiver or one-time settlement, in principle, should be meant for helping a person who is in distress in spite of his best effort to come out of the debt. Fourth, in respect of cooperative loans, there is a widespread practice that at the end of the financial year, the loans are shown as recovered for the sake of keeping the balance-sheet healthy and the same or similar amounts are shown as advances in the next fortnight. Thus, there are no or a few defaults and over-dues. Yet, de facto loans are not recovered and are in default. Such borrowers will not be entitled for loan-waivers or OTS. The main benefit of loan-waiver will go to the states where the percentage of marginal farmers below one hectare is larger. In terms of operational holdings, the country has 63 per cent marginal farmers below one hectare and the percentage of small farmers, between one to two hectares, is 18.08 (2000-01 data). Thus, the beneficiaries of the loan-waivers would be over 81 per cent of the farmers in the country. Yet, how many of these farmers have obtained loans from institutional sources is another question. Most of the marginal and small farmers resort to loans from private moneylenders and commission agents. They can not benefit from the loan-waivers announced by the government. Punjab had only 18.65 per cent marginal farmers and 16.78 per cent small farmers in 1995-96. In 2000-01, the percentage of marginal farmers declined to 12.31 and that of small farmers increased marginally to 17.35 per cent, making it a total of 29.66 per cent eligible beneficiaries of loan-waivers. This percentage must have declined further because of the trend of reverse tendency in the state. Again, a majority of these farmers are likely to have borrowed from private moneylenders and commission agents. Thus, the loan-waiver dispensation contained in the Central budget, even after the webs of confusion are cleared, is not going to help much the marginal and small farmers in the state. If the government had to adopt the pathway of loan -waivers to alleviate the distress of the farm sector, it would have been much better to put monetary limits of, say, Rs 20,000 to Rs 30,000 or even higher amounts across the board and then OTS as an alternative for the borrowers of higher amounts, whichever may be their choice. Real benefit would have flowed to these categories of farmers if some steps had been taken to reduce the burden of debt from informal sources of private moneylenders and commission agents, about which the scheme is eloquently silent. Regulation of private moneylenders under an act of the Parliament can go a long way in alleviating the distress of farmers, specially the marginal and small farmers. The essentials of this act should include no claim as collateral on one house and five acres of land and interest limit at the maximum 3 or 4 per cent above the prime lending rate of the banking sector. Again the provision should be that if repayment is made twice the capital borrowed, the loan should be considered as fully repaid. These provisions will help those borrowers who opt to take recourse to the law against usurious rates of interest and exploitation by the private moneylenders. These steps would prove to be a better option in the interest of the farming community of the country.