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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    Sankaran Krishnan
    Jun 8, 2017 at 4:34 pm
    None of the Politicians (irrespective of the party they belong) will not heed the advice of RBI because Politicians wanted to stick on power and if they refuse the Opposition Parties will shout from the roof top of their States and without any botheration will inform Laon Waiver for Farmers if they came to power and the Ru party will never take that risk and instead doe the same thing like i was done during the corrupt UPA regime and the respective states that had gone for waiver of loans !!! What for Rahul and the so called Opposition Parties gone to the MP Farmers stir is to make political capital out of this issue and the real intention is not to help the Farmers and now where the so called Economist PM and his Jugglery Expert Chidambaram had gone ????
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      arc
      Jun 8, 2017 at 12:52 am
      Pointless tel the govt anything. Modi is an uneducated S.0.B who does not understand anything. Jaitely as finance minister doesn't know anything about finance except the under the table cash he used to charge for lying before the court as lawyer . the rest of Modi's ministers have an average education of cla55 6 fail.
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        patel
        Jun 8, 2017 at 12:46 am
        Why not have loan holiday as opposed to loan waiver
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          Truth
          Jun 8, 2017 at 12:40 am
          Easy win for Modi in 2019 with all loans waived for farmers and corporates alike .........Taxpayers will of course continue to be burdened by the Govt which in turn will donate freebies (for votes) ...........Unfortunately, the honest taxpayers are neither rich nor poor but belong to the oppressed middle segment !
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            Proud Bhakt
            Jun 8, 2017 at 12:37 am
            Loan waivers , Freebies and subsidies are ok when BJP state Govts dole them out . But it is not alright if non-BJP Govts do the same .
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              Vijendra
              Jun 7, 2017 at 11:26 pm
              All farmer doesn't take loan...so policy must be for all...must hv solution of core issues....
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                Bhakts view
                Jun 7, 2017 at 11:26 pm
                Rbi is dancing on the tune of the opposition .. dia will soon become the golden bird ,wait n watch .....Modiji is soon announcing 10 lakh jobs and farmers will be getting all the latest equipments for farming .....by 2019 all farmers will be billionare .....those not agreeing with my point are antinational ,congressi and aaptards
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                  Tushar
                  Jun 7, 2017 at 11:07 pm
                  BJP government had caught on tigers tail ....if they leave the tail tiger will attack ..if not ,they can't get rid off this situation ... They were opposing the same. waver magic when Rahul. proposed it to modi. All leaders from party mocked it by saying BJP doesn't encourage freebies .those who want to earn they have to perform and work hard .... And criticized Congress for initiating such a practice .. The very next month they have announced their manifesto in which one of the promise was loan waiver ....Now they are paying for such a dirty game
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