Farm loan waivers a 'moral hazard', must be avoided: Urjit Patel

The Reserve Bank of India (RBI) Governor Urjit Patel speaks during a news conference after the bi-monthly monetary policy review in Mumbai, India, October 4, 2016. REUTERS/Danish Siddiqui/File Photo - RTSQV2E

In what may be a disapproval of the Uttar Pradesh government's decision to announce a farm loan waiver, Reserve Bank of India Governor Urjit Patel said that a consensus must be created to make political parties avoid making farm loan waiver promises during election campaigns.

Such promises are a "moral hazard" and affect tax payers, Patel said while answering a question about loan waivers, at a press conference following the central bank's first bi-monthly monetary policy for FY18.

The Patel-led Monetary Policy Committee (MPC) left repo rate or key lending rate unchanged at 6.25 percent, but hiked the reverse repo rate to 6 percent.

Putting on the economist hat, Patel said there are several conceptual issues on farm loan waivers.

“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 press conference on Thursday.

Such a move increases borrowing by the government which could result in higher yields on government bonds and in turn lead to an increase in cost of borrowings for others. This can lead to crowding out of private borrowers.

He added, “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.”

Earlier this week, Uttar Pradesh chief minister Yogi Adityanath had announced a Rs 36,359-crore loan waiver for about 21 million small and marginal farmers in the state.

Citing concerns after the poll promise was made, State Bank of India (SBI) Chairman Arundhati Bhattacharya had also said, “Credit discipline breaks when you waive off farm loans. Money will come in today because the government will pay, but when we will give loans in future, farmers will wait for next elections. Support to the farmers is necessary but not at the cost of credit discipline.”

Bankers have complained that many farmer borrowers of other states are already not servicing their loan installments.