After UP, Maharashtra mulls loan waive off: Here's how farm loan waivers affect the economy

Disagreeing with farm loan waivers, Reserve Bank of India governor Urjit Patel during the first bi-monthly monetary policy statement for 2017-18 on Thursday said such waivers undermines honest credit culture, impact credit discipline.

With Uttar Pradesh Chief Minister Yogi Adityanath announcing loan waiver for farmers as part of his poll promise, the debate how such practices affect the Indian economy has returned to the fore.

ALSO READ: RBI governor Urjit Patel says farm loan waiver a moral hazard

Disagreeing with farm loan waivers, Reserve Bank of India governor Urjit Patel during the first bi-monthly monetary policy statement for 2017-18 on Thursday said such waivers undermines honest credit culture, impact credit discipline.

ALSO READ: Yogi Adityanath fulfills poll promise, waives off farm loans up to Rs 1 lakh

We look at how farm loan waivers adversely affect the economy.

Fiscal deficit

With the government repaying loans to banks on behalf of farmers, its expenditure books get bloated. This in turn affects the finances of the government, thus increasing its fiscal deficit. Fiscal deficit is the difference between the total revenue and expenditure of the government.

Loan disbursal process

The repayment of loans by the government is a gradual process, with multiple checks being carried out to correctly identify and ascertain the eligibility of beneficiaries of the scheme. This leads to banks (read public sector banks) taking a hit on their loan books while they close their accounts at the year and quarter end.

Though public sector banks can be easily arm twisted by the government to lend to definite parties, they tread a cautious approach while they give loans to farmers on fears of them going bad.

So, the next time a defaulting farmer applies for a loan, he may face delay in sanctions, high collateral requirements, reduction of quantum of loans, lengthy and complex documentation requests, etc.

It's almost compulsory for banks to give loans to the farmers of a poll-bound state but the defaulters are likely to be entertained lesser, next time they knock the banks' doors for agricultural needs.

Little incentive in repaying loans

With the government's decision to waive off the loans, there remains very little incentive for farmers who want to pay back. When farmers already know political parties will compete for their votes promising loan waivers in the next poll campaign, they are less likely to repay loans to the banks even if they have the capacity to do the same.

Spending on development

The funds which could have been used to meet the long-term infrastructure and development needs of the state are diverted to repay the loans of farmers. This will affect the progress of the state which resorted to farm loan waivers.

Call from more states for loan waiver

After Uttar Pradesh cleared farm loan waiver for nearly 86 lakh farmers, calls have grown for a similar practice in BJP-ruled Maharashtra. While the Devendra Fadnavis government is still studying the Uttar Pradesh model, Opposition parties-Congress and NCP-have been strongly calling for a farm loan waiver in their state too.

Apart from political parties raising their voice for loan waiver, farmers of different states too feel neglected when they hear about the relief given to their counterparts in a particular state. This leads to calls for loan waiver going viral and puts the state governments in a bind.