Loan waivers increasing fiscal slippage risk, RBI warns Govt

A Bank of America Merrill Lynch report has said various state governments are expected to waive off $40 billion, or Rs 257,000 crore, of farmers’ loans in the run-up to the 2019 general elections.

Written by George Mathew | Mumbai | Updated: June 8, 2017 4:15 am
RBI, India Inc, RBi repo rate, Although the Finance Ministry has said that states have to fund their own farm loan waivers, that is scarcely possible without disrupting bond markets.

The Reserve Bank of India’s six-member Monetary Policy Committee (MPC) headed by Governor Urjit Patel on Wednesday cautioned the government against large farm loan waivers, saying that the risk of fiscal slippages has risen with such waivers.

“The risk of fiscal slippages which, by and large, can entail inflationary spillovers, has risen with the announcements of large farm loan waivers,” the MPC said after a two-day meeting here.

The RBI’s caution has come at a time when it was working on steps to resolve over Rs 7 lakh-crore bad debts of corporates.

Patel had warned against loan waiver in the April monetary policy as well. However, last week, Maharashtra government said it would waive loans of Rs 30,000 crore, owed by farmers with up to five acres of land, by October. Protests by farmers are currently underway in neighbouring Madhya Pradesh as well. In April this year, Patel had said that a farm loan waiver “undermines an honest credit culture” and could “affect the national balance sheet”.

“There are several conceptual issues… I think it undermines an honest credit culture. It impacts credit discipline. It plugs incentives for future borrowers to repay. In other words, waivers engender moral hazard,” Patel had said. “I think we need to create a consensus such that loan waiver promises are eschewed. Otherwise, some sovereign fiscal challenges in this context could eventually affect the national balance sheet,” he said.

Although the Finance Ministry has said that states have to fund their own farm loan waivers, that is scarcely possible without disrupting bond markets. Farm loan waiver would prove counter-productive for the RBI’s measures to clean up bank balance sheets.

A Bank of America Merrill Lynch report has said various state governments are expected to waive off $40 billion, or Rs 257,000 crore, of farmers’ loans in the run-up to the 2019 general elections. This is almost two per cent of India’s GDP.

After the UPA government announced a loan waiver scheme involving Rs 65,000 crore and three crore small and marginal farmers, the country witnessed more than half-a-dozen loan waiver proposals from various states in the last nine years. More states are now joining the bandwagon.

This year, Uttar Pradesh Chief Minister Yogi Adityanath decided to waive loans of Rs 36,359 crore taken by about 94 lakh small and marginal farmers in the state fulfilling a BJP poll promise. The waiver amount included Rs 5,630 crore loans of 7 lakh farmers whose accounts were declared non-performing assets (NPAs) by banks.

Last year, the late Chief Minister J Jayalalithaa had waived loans of 16.94 lakh marginal and small farmers who own less than five acres of land, imposing a financial burden of Rs 5,780 crore on the state government. The Madras High Court later asked the Tamil Nadu government to waive additional farm loans to the tune of Rs 1,980 crore. The order is expected to benefit over three lakh farmers who were not covered under the loan waiver scheme.

In 2014, the TRS government headed by K Chandrasekhar Rao waived crop loans of farmers to the tune of Rs 17,000 crore as part of its poll promise. The fourth and final instalment of Rs 4,000 crore was paid to bankers recently. Crop loans up to Rs 1 lakh of 36 lakh farmers were waived.

In Andhra Pradesh, N Chandrababu Naidu’s Telugu Desam Party promised a farm loan waiver involving Rs 1.50 lakh crore before the state elections in 2014. However, banks refused to play the ball as the amount was huge and they cited reasons like impact on credit repayment discipline to reject the plan.

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