Farm loan waiver undermines fair credit culture, says Urjit Patel

Says liquidity measures undertaken to reduce cost of borrowing by 0.25% for lower segment

Reserve Bank Governor Urjit Patel today cautioned that loan waiver schemes "engender moral hazard", undermining honest credit culture and impairing incentives for borrowers to repay bank loans.

The comment comes against the backdrop of recent decision by the UP government to waive Rs 36,000 crore in farm loans and 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 Rs 1 lakh, totalling a staggering Rs 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 Rs 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.

Yesterday, Maharashtra Chief Minister 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.After the Reserve Bank of India left its benchmark lending rate unchanged at 6.25 per cent on Thursday,  RBI Governor Urjit Patel said farm loan waiver undermining honest credit culture and entailing transfer of taxpayers' money is a moral hazard.

He said RBI is in talks with the government to introduce standing deposit facility (SDF), which will help manage liquidity effectively and drain out excess cash in the system.

“Liquidity measures undertaken today to reduce cost of borrowing by 0.25 per cent for the lower segment,” Patel said. 

RBI, however, increased the reverse repo rate, which it pays to lenders, by 0.25 per cent to 6 per cent, narrowing the policy rate corridor.

"The objective is to more finely align the money market rates with the policy rate, bring down volatility and create conditions for improved transmission of monetary policy across the whole spectrum of interest rates," Patel said.

Given the upside risks to inflation and excess liquidity in the system, the repo rate has been retained at 6.25 per cent but the reverse repo has been revised upwards. The Marginal Standing Facility has been revised downwards (rpt) downwards by 0.25 per cent to 6.5 per cent, the central bank said in the first bi-monthly monetary policy review of 2017-18.

The central bank said the policy decisions are unanimous.

On the basis of gross value add, RBI sees the economy accelerating to 7.4 per cent in the current fiscal, up from 6.7 per cent in 2016-17.

The next meeting of the Monetary Policy Committee on June 5 and 6.