Farm loan waiver engenders a moral hazard, says Urjit Patel

Debt waivers also entail transfers from taxpayers to borrowers, says Patel

Reserve Bank of India (RBI) Governor Urjit Patel on Thursday expressed displeasure over the current spate of farm loan waivers and said these adversely affect the culture of repayments as well as put a severe burden on the exchequer.

“I think it undermines an honest credit culture. It impacts credit discipline. It impacts incentives for future borrowers to repay. In other words, waivers engender a moral hazard,” he said, after announcing the first bi-monthly monetary policy for 2017-18.

The RBI governor added, “We need to create a consensus that such loan waiver policies are eschewed. Otherwise, sub-sovereign fiscal challenges in this context could otherwise affect national balance sheets.”

On Tuesday, the recently formed Bharatiya Janata Party (BJP) government in Uttar Pradesh (UP), being true to its election promises, approved waiver of farm loans for 21.5 million farmers. The amount written off was Rs 36,359 crore.

The state government plans to issue farmer bonds to repay the dues of banks, but there are posers on whether UP will find any takers for these bonds.

In Maharashtra, too, the state government, comprising the BJP and the Shiv Sena, is planning to cobble up a similar debt-waiver package. 

Debt waivers also entail transfers from taxpayers to borrowers, said Patel.

“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.