Farm loan waivers a bad idea: RBI governor Urjit Patel

MUMBAI: Reserve Bank of India governor Urjit Patel has sounded the alarm on state governments waiving farm loans and has called for a consensus on eschewing them to avoid damaging the national balance sheet.Uttar Pradesh chief minister Yogi Aditya Nath recently announced a Rs 36,000-crore farm loan waiver, which could trigger copycat decisions by the Punjab and Maharashtra governments. "It undermines honest credit culture, it impacts credit discipline, and it plugs incentives for future borrowers to repay. In other words, waivers engender moral hazard," said Patel.Responding to a question on whether there were any concerns on loan waivers, Patel said they entail transfers from tax payers to borrowers. "If on account of this, overall government borrowings go up, yields on government bonds are also impacted. Thereafter it can also lead to the crowding out of private borrowers as higher government borrowing can lead to an increase in cost of borrowing for others," he said.Patel is not the first banker to criticise farm loan waivers . Some of his comments are a reiteration of what State Bank of India chairman Arundhati Bhattacharya had said last month. "We feel that in case of a (farm) loan waiver there is always a fall in credit discipline because the people who get the waiver have expectations of future waivers as well," the chief of the country's largest bank had said, adding, "Today the loans will come back as the government will pay for it but when we disburse loans again then the farmers will wait for the next election expecting another waiver." Bhattacharya's statement resulted in the Maharastra opposition moving a breach of privilege motion against her in the assembly.On Tuesday, UP chief minister Yogi Aditya Nath fulfilled his campaign promise of writing off farmer loans.The waiver is to be funded by the state government through resources raised by issuing Kisan Rahat Bonds (farmer relief bonds).A day after the announcement, Maharashtra chief minister Devendra Fadnavis said he was studying the UP model. The Congress election manifesto for the Punjab assembly elections had also pledged waiver of farm debt, but the Amarinder Singh government has not yet finalised a scheme.In a report following the UP announcement, Sonal Varma, chief economist, Nomura said that while the Kisan Rahat Bonds won’t add to the state’s headline fiscal deficit directly, the liability will remain and understate the headline fiscal deficit. She added that this would be a fresh burden in addition to the Seventh Pay Commission hikes and could put pressure on other states to follow suit.