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TWO DAYS after Uttar Pradesh Chief Minister Yogi Adityanath announced a Rs 36,359-crore farm loan waiver scheme, Reserve Bank of India (RBI) governor Urjit Patel Thursday said that any such move “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,” said Patel.
“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,” said Patel.
Speaking at a press conference to announce the bi-monthly monetary policy, Patel also confirmed that the repo rate, or the rate at which banks borrow from the RBI, remained unchanged at 6.25 per cent. However, the central bank has increased the reverse repo rate, the rate at which banks lend funds to the RBI, by 0.25 per cent to 6 per cent, given the excess liquidity in the system, he said.
Patel’s remarks on loan waivers come at a time when other states, including Maharashtra, are witnessing similar demands. The RBI governor also highlighted the other risks that could arise as loans are written off.
Patel said that waivers can lead to high government borrowings, which can impact yields on government bonds. “It (loan waiver) also entails, at the end of the day, transfer from tax payers to borrowers. If on account of this, overall government borrowing goes up, yields on government bonds are also impacted. Thereafter, it can also lead to crowding out of private borrowers as high government borrowing can lead to increasing cost of borrowings for others,” Patel said.
Patel’s predecessors at the RBI, including Raghuram Rajan and D Subbarao, had also opposed such loan waiver schemes. On March 15, State Bank of India chairman Arundhati Bhattacharya had said that waivers disrupt “credit discipline” among borrowers as they expect future loans to be waived as well.
In 2014, the banks and RBI had successfully resisted attempts by the newly formed Telangana and Andhra Pradesh governments to force commercial banks to write off farm loans.
Earlier this week, the UP government decided to waive loans of Rs 36,359 crore taken by about 94 lakh small and marginal farmers in the state. The waiver amount includes Rs 5,630 crore loans of 7 lakh farmers whose accounts were declared non-performing assets (NPAs) by banks.
The waiver was part of the BJP’s assembly poll manifesto in UP. During the poll campaign, Prime Minister Narendra Modi, too, had promised loan waivers for farmers if his party came to power in the state.
Also this week, the Madras High Court directed the Tamil Nadu government to waive all farm loans and restrained officials from initiating any penal action against defaulting farmers. The order is expected to benefit over 3 lakh farmers not covered under the loan waiver scheme ordered by the late Chief Minister J Jayalalithaa last June.
As per her election promise, Jayalalithaa had waived the 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.