New Delhi, June 12, 2017

Finance Minister Arun Jaitley on Monday ruled out the Centre’s financial support for any farm-loan waiver schemes announced by the States, stating that the States would have to meet the cost out of their own resources if they were to go in for such initiatives.

The remark is significant as it comes on the heels of the Maharashtra government’s farm-loan waiver announcement—expected to cost about Rs.35,000 crore—on Sunday, even as farmers from Madhya Pradesh were demanding similar relief.

“I have already made the position clear that States which want to go in for these kinds of schemes (farm-loan waiver) will have to generate their own resources. Beyond that, as the Central government, I have nothing more to say,” Jaitley said when asked about the Maharashtra government’s announcement.

The RBI had in a recent report cautioned States against jumping onto the farm-loan waiver bandwagon, stating that such ad hoc initiatives could add to their fiscal burden and affect their finances over the medium term.

The central bank had cautioned that loan waivers impact credit discipline, vitiates the credit culture and disincentivises borrowers from repayment, leading to moral hazard with expectations of future bailouts.

“While these loan waivers could alleviate the immediate debt burden of financially distressed farmers, it is essentially a transfer from taxpayers to borrowers with an adverse bearing on the fiscal viability of States,” said the RBI report ‘State Finances: A Study of Budgets of 2016-17’.

The RBI had also cautioned about any issuance of debt relief bonds by State governments as they would increase government borrowings and lead to firming up of yields on State Development Loans, posing a higher interest burden in the future. This can also crowd out private borrowers, the RBI report had warned.

With the RBI not in favour of such farm-loan waivers by States, economy watchers wonder who would be the nodal agency for the Maharashtra government’s scheme.

In the previous rounds of farm-debt waiver, the RBI had acted as a nodal agency, providing the settlement, said industry observers. This time round, the Maharashtra government may reimbursebanks directly through the State Level Bankers Committee mechanism.

But whichever route is taken, banks will take a hit, say banking sources. “Every three-four years, you announce farm-loan waivers, so nobody repays. But you also require banks to give fresh loans to the same farmer,” a former chief executive of a public sector bank said.

[The Hindu Business Line]