Mumbai, April 6, 2017

Days after the BJP government in the northern Indian state of Uttar Pradesh waived over INR 36,000 crore in farm loan, Reserve Bank of India Governor Urjit Patel on Thursday warned that such schemes undermine honest credit culture and impair incentives for borrowers to repay bank loans

Observing that loan waiver schemes "engender moral hazard", the Governor pitched for creating a consensus against loan waiver promises in the interest of healthy national balance sheet and public at large

The comment assumes significance against the backdrop of UP government's decision on farm loans and its consequent fallout in terms of increasing demand from politicians for similar concessions in other parts of the country

"I think it (loan waiver schemes) undermines an honest credit culture. It impacts credit discipline. It (impacts) incentives for future borrowers to repay. In another words, waivers engender moral hazard," he said after announcing the first bi-monthly monetary policy for 2017-18

Debt waivers also entail transfers from taxpayers to borrowers, he said

"If on account of this overall government borrowing goes up, yields on government bonds also get impacted. Thereafter, it can also lead to crowding of the private borrowers as higher government borrowing can lead to increasing cost of borrowing for others," he said

Earlier this week, the newly formed government in Uttar Pradesh, in its first Cabinet meeting, decided to waive crop loans up to INR 1 lakh, totalling a staggering INR 36,359 crore

The move will benefit over 2.15 crore farmers, besides 7 lakh others who had secured loans which turned into non- performing assets (NPAs)

The Yogi Adityanath cabinet decided to float Kisan Rahat Bonds for raising INR 36,359 crore required for waiving loans of small and marginal farmers who form 92.5 per cent of the total 2.30 lakh farmers in the state. The decision of waiver was made against the backdrop of electoral promise made by BJP if it is elected to power

"I think we need to create a consensus such that loan waiver promises are eschewed, otherwise such sovereign fiscal challenges in this context could eventually affect the national balance sheet," Patel said

On Wednesday, Chief Minister of the western Indian state of Maharashtra Devendra Fadnavis said the state government will study the Uttar Pradesh model of farm loan waiver

Speaking in the Legislative Assembly, where Shiv Sena and BJP members demanded that the state government announce a loan waiver for distressed farmers, Fadnavis had said, "we will study how Uttar Pradesh will raise such a huge amount"

On the same day of the UP development, the Madras High Court had ordered the state administration to waive all farmers' loans and not differentiate between large and small farmers. The move would drain the public resources by close to INR 1,900 crore

Expressing reservations over farm loan waiver schemes, State Bank of India Chairman Arundhati Bhattacharya had said such sops may disrupt credit discipline among borrowers

"We feel that in case of a (farm) loan waiver there is always a fall in credit discipline because the people who get the waiver have expectations of future waivers as well. As such future loans given often remain unpaid," she had said last month

The Reserve Bank has been repeatedly speaking out against farm loan waivers every time they are discussed

Patel's predecessor Raghuram Rajan had decried similar moves in Andhra during his term citing the move as a moral hazard.

[PTI News]