Loan waiver schemes undermine honest credit culture: Patel

In what may be a disapproval of the Uttar Pradesh government's decision to announce a farm loan waiver, Reserve Bank of India Governor Urjit Patel said that a consensus must be created to make political parties avoid making farm loan waiver promises during election campaigns. Many other state governments are also taking such initiatives as taken in the first Cabinet meet of Yogi and are urging the RBI Governor to get their farmers loans also waived off. But it is fiscally weak, with its deficit soaring to the highest in four years.

"Farm loan waiver undermines honest credit culture and entails transfer of taxpayers' money".

Apart from this, there are many other farmers who had taken a loan and have been now turned into NPAs (non-performing asset's).

"The UP government has budgeted a fiscal deficit of Rs 415 billion (~2.9% of state GDP on our estimates) in FY18, but with Seventh Pay Commission hikes also pending the risks of this rising (both above and below the line) is to the upside".

Outstanding countrywide agricultural loans as of 30 September were at Rs 12.6 trillion, as farmers struggled with a decrease in land holdings, deteriorating soil quality, high input costs and low prices for their produce.

Earlier this week, Uttar Pradesh chief minister Yogi Adityanath had announced a Rs 36,359-crore loan waiver for about 21 million small and marginal farmers in the state. He was replying to a question on the Uttar Pradesh government's announcement of waiver of farm loans worth over Rs 36,000 crore earlier this week.

Patel is not the first RBI governor to criticise farm loan waivers. How effective have these debt waivers been?

Bhattacharya had expressed her reservations over the demands for and assurances of farm loans waiver, coming up from different quarters in the recent months. In fact the studies that we have typically show that they have been ineffective. "In fact, they have constrained the credit flow, post waiver, to farmers", he had said at the annual conference of the Indian Economic Association. "That is because of moral hazard that was created in 2008 when there was a write-off of large agriculture loans".

  • Leroy Wright