Why crop insurance schemes fail poor farmers when they are needed the most

If the image of a farmer hanging himself from a tree at Jantar Mantar in the Capital haunts India, it is because perhaps for the first time urban India came face to face with self-destruction that so far appeared to be happening thousands of miles away in a Bharat cityslickers found difficult to put a finger on.
And if thousands of farmers are killing themselves on their ravaged fields, it’s not just because the weather gods have been brutal; it’s also because the protection from such climatic flippancy, in terms of crop insurance, has failed the farmer when he needed it the most.

The suicides that are being reported from farms across the country clearly indicate that these schemes have not found enough takers. Worse, even in cases where the farmer has signed up for a policy, he may not be eligible to make a claim when he is badly hit on account of loan defaults.

Research done by ET Magazine suggests two major flaws apart from several lesser evils. The two biggest problems with the design of these schemes is that, first, even extremely poor farmers are expected to pay the premium. Second, if the farmer gets trapped in a cycle of debt and defaults on his agricultural loan — to which his crop insurance scheme is linked — his policy becomes inoperative.

Thousands of farmers who have opened insurance plans through the Kisan Credit Card (KCC) scheme for instance find they cannot claim insurance because of unpaid dues on their bank loan.

Earlier in the week, ET reported that home minister Rajnath Singh is keen to fast-track the much-proposed National Crop Income Insurance scheme, which will merge all farm-related insurance schemes and provide cover for production-related risks and price volatility.

As India appears headed for yet another below-par monsoon, the home minister’s initiative is doubtless welcome, but if the new schemes have to be effective, the government may need to plug some basic flaws, suggest experts ET Magazine spoke to.

States with Low Insurance Cover (Source: Crop Insurance officials)

- Punjab, Haryana, Madhya Pradesh, Western Uttar Pradesh

- Farmers here don’t have any knowledge about insurance and remain without cover

- Small farmers have no incentive as they have to pay the premium

- In many cases farmers have written to banks saying they do not want insurance

- The banks have complied with such requests to meet targets although insurance is a compulsory feature of agricultural loan schemes

What the Experts Say:

- The government needs to legislate on the subject, making insurance cover compulsory The government should pay the premium for small farmers

- Holding agricultural as well as bank officials accountable for process pertaining to crop insurance should also be a part of the legislation



States with High Levels of Insurance Fraud (Source: Crop Insurance officials)

- Maharashtra (Aurangabad and Jalgaon), Gujarat (Saurashtra), Andhra Pradesh (Rayalaseema), Karnataka (Dharwad and Haveri), Tamil Nadu (Nagapattinam and Sivaganga) and Telangana (Mahbubnagar)

- Coverage in these regions is high and so is fraudulence

- In some districts hundreds of farmers are literally living off fraudulent claims

The Modus Operandi:

- Networks of farmers, bank officials and agriculture department officials run these rackets

- Government officials show a higher loss while bank officials help farmers insure the same land repeatedly
Food For Thought

That farmers have to pay the premium has met with a backlash in multiple states with several farmer associations even writing to insurance companies to not debit the insurance premium. Given that the banks are under pressure to meet targets for the KCC, they decide to waive off the premium component.

According to a senior official with a public sector insurance company, crop insurance schemes were linked to farm loans to provide comprehensive coverage. But since the premium has to be paid by the farmers, they prefer to do away with the insurance component.

“If you tell the farmer that the crop insurance will stop if you default on loan repayments, how is this helping him during a crisis? This is important, given that the state decided to set up crop insurance schemes not only to help the farmer but also from a food security perspective. Giving aid to small farmers in terms of financial stability is one way of ensuring food security,” says the officer.

The Big Divide

These schemes have also broadly cleaved India into two parts with one set of states, which are under-penetrated , reporting lack of awareness among farmers about insurance even as multiple frauds are being reported from the second set of states that have better coverage.

Talking to various experts who have implemented these schemes on the ground, ET Magazine got a sense of the huge divide.

An official who has worked on the field in several north Indian states for over two decades said some states that had an early lead in setting up cooperative banks and other institutions were able to implement crop insurance schemes faster. These states also have had to repeatedly deal with drought, cyclones and other calamities.

However, strong “local networks” of farmers, bank officials and agriculture department officials have cornered all these schemes by perpetrating various frauds.

The states where crop insurance frauds are being reported continuously include Gujarat, Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu. According to this official, farmers in some districts in these states pay off officials handling the yield assessment.

“In Mehsana in Gujarat, there was a case where the farmers had collected claims which suggested the groundnut yield was 32 quintals per acre. But when the state government did a re-check, they found the actual yield was around 450 quintals,” said this official.

“There are districts in the country where the farmers only harvest insurance claims.” The districts that report crop insurance frauds regularly include Dharwad and Haveri in Karnataka, Sivaganga and Nagapattinam in Tamil Nadu, Aurangabad and Jalgaon in Maharashtra, the Saurashtra region of Gujarat and the Rayalaseema region of Andhra Pradesh.

Political influence has also played a role in the acceptance of multiple claims over the same plot of land, which is the most common form of fraud. “If you have influence, you can get the bank manager to sanction multiple loans and crop insurance policies over the same plot under the names of various members of the family. This is almost the norm in these districts,” says the official.

In Maharashtra, officials say, farmers take up insurance only for seasons when they know they would suffer bigger losses. They are able to do so because a high court order has made crop insurance a strictly voluntary component of farm loans. There is also an ample time lag between the last date for acceptance of insurance policy applications and the time for assessing the monsoon pattern.

Officials say this affects their business case because the premium collected in the state is extremely low when compared to the claims.

Lack of Awareness

Even as the insurance company struggles to deal with fraudulent claims in these states, there exists another set of states where the coverage is poor and the farmers have little awareness. These states are led by Punjab which is yet to sign up for any crop insurance policy. Haryana, western Uttar Pradesh and Madhya Pradesh are some of the other states that have a poor record of getting crop insurance schemes implemented.

When ET Magazine visited Bundelkhand to take stock of the condition of farmers after unseasonal rain and hailstorm destroyed crops across India, more than 20 farmers said that although they did pay premium for a couple of years, they have never been able to claim insurance money despite suffering losses year after year.

An officer with a local bank that implements the KCC scheme said the farmers were not aware of how the insurance schemes worked. Most of them, for instance, did not know that the policy becomes inoperative if they default on payments. “The farmers do not know anything about the guidelines. The government has also not made any effort to make them aware. This is why these schemes are not too effective,” the bank manager said.

An official with the government insurance company said the average small farmer in the country is estimated to earn around Rs 1,700 per month and a 10% insurance premium — Rs 170 per bi-annual season — is a substantial amount for him.

Experts ET Magazine spoke to said India needs to legislate on crop insurance. A crop insurance expert suggested five broad points for an effective legislation. Firstly, banks should not be allowed discretionary powers of doing away with crop insurance as a component of farm loans. Secondly, the premium component for small farmers should be paid for by the state.

Also, well-to-do farmers should not get any subsidy for premiums as this will also help curtail frauds pertaining to repeat claims on the same plot of land. “But most importantly crop insurance policies should not come to a halt when a farmer defaults on account of the stress on him. When he gets continuous protection from agricultural distress, he will be motivated to continue with farming,” said the expert.



How Loans Going Bad Also Result in Unpaid Insurance Premiums

- Farmer takes a loan to meet cost of cultivation and for working capital; insurance premium is deducted

- Drought, flood or, as was seen recently, unseasonal rains damage the crop

- The farmer is unable to repay loan; as a result the insurance premiums can’t be paid; insurance goes to waste

- Farmer takes a loan from a moneylender to pay off previous loans

- The moneylender gets aggressive in case of default and threatens him. Many a time, the humiliation causes the farmer to commit suicide