The Reserve Bank of India on Wednesday expressed concern over the farm loan waivers that several state governments had been announcing. In its 2016-2017 annual report, the central bank cautioned against such “unconditional bailouts”, saying they could affect fiscal credibility in the medium term.
“The announcement of farm loan waivers by four state governments [so far in 2017-18] and the potential announcement by several others pose a major fiscal risk over the medium term,” the RBI said.
The report added that lessons from the central government’s debt waivers in 2008-2009, which cost the exchequer Rs 71,700 crore, showed that the benefits were “highly skewed and concentrated in states where concentration of land holdings was low on account of land reforms”.
While such loan waivers may clean up banks’ balance sheets in the short term, as state governments take over the burden of repaying the loans, such policies demotivate banks from lending to agriculturists in the long term, the RBI explained.
“Consequently, loan waivers can have a dampening impact on rural credit institutions,” the report said. “Moreover, they impact credit discipline, vitiate credit culture and dis-incentivise borrowers to repay loans, thus a engendering moral hazard.”
The RBI’s annual report further said that such random policy shocks “have an enduring impact on market borrowings of governments, as evident from past episodes of such waivers”. “They increase the interest rates the governments need to pay for the loans they borrow,” it said.