RBI governor Urjit Patel says farm loan waiver a moral hazard

In its first bi-monthly monetary policy statement for 2017-18, RBI governor Urjit Patel said farm loan waiver undermines honest credit culture, impacts credit discipline.

The Reserve Bank of India on Thursday took a subtle dig at the government's practice of approving loan waivers for farmers.

In its first bi-monthly monetary policy statement for 2017-18, RBI governor Urjit Patel said farm loan waiver undermines honest credit culture, impacts credit discipline.

The statement comes two days after Uttar Pradesh chief minister Yogi Adityanath announced farm loan waiver of up to Rs 1 lakh which would cost the exchequer Rs 30,729 crore.

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"A farm loan waiver undermines an honest credit culture and impacts credit discipline. It plugs incentives for future borrowers to repay. In other words, it engenders moral hazard and also entails transfer from tax payers to borrowers, " Patel said in a post monetary policy conference.

Expressing disagreement with the practice of the government, the governor said, "I think we need to create a consensus that farm loan waiver promises are eschewed. Otherwise, sub-sovereign fiscal challenges in this context could eventually affect the national balance sheet."

Such promises are a moral hazarad and affect tax payers, Patel said while answering a question about loan waivers.

Farm loan waivers to appease the votebank forces the government to borrow more and results in higher yields of government bonds.

A rise in borrowing costs adversely affects fiscal discipline of the government.

India Ratings & Research on Uttar Pradesh farm loan waiver

"The debt waiver for the small and marginal farmers (in UP) is not the long-term answer to any agrarian crisis. It will only provide short-term relief to distressed farmers, but will also lead to a bad credit culture, besides exerting pressure on state finances," said the report by India Ratings & Research (Ind-Ra).

The rating outfit estimates the direct impact of the debt waiver on the state exchequer would be about Rs 363.59 billion, which is around 2.6 per cent of UP's gross state domestic product (GSDP). Despite being under pressure, the finances of the UP government are in relatively better shape than the situation a decade ago. The state has been generating revenue surplus from FY07 onwards. It had shown revenue surplus of Rs 223.94 billion in FY15, Rs 183.68 billion in FY16 and Rs 282.01 billion in FY17, the report said.

The state spends a significant part of its expenditure on the power sector. As UP was the first state to join UDAY and has also raised bonds from the market for financing the losses of the power sector, Ind-Ra believes this will provide some fiscal space for the government to absorb the expenditure arising out of the farm debt waiver.

The UDAY scheme was floated by the Centre to bailout debt-ridden power utilities in states. Ind-Ra said the UP debt waiver can significantly impact the credit culture among the agriculture communities in other states. More importantly, demand for debt waiver may come in from other states as well.

The waivers may mask the delinquencies for the time being. Nevertheless, it carries the risk of significantly impairing asset quality going forward. The unintended outcome of this could be reduced availability of credit to the farmers from banks, forcing them to resort to the unorganised lending sector, it said.

(With PTI inputs)