Experts caution against loan waiver

The Asian Age.

Metros, Mumbai

When the UPA Government announced a farm loan waiver package of Rs 72,000 crore in 2008.

Experts have voiced concern over how soon banks will be recapitalised in the event of a farm loan waiver.

Mumbai: The banking industry, including the governor of Reserve Bank of India (RBI), may have raised concerns regarding the farm loan waiver, stating it would disrupt credit discipline, but others feel such measures will affect state finances and lead to cut-down in capital expenditures.

In its first Cabinet meeting, the Yogi Adityanath-led UP Government announced a massive loan waiver to the tune of Rs 36,359 crore, the biggest so far by any state. This triggered similar demands from various political parties across India.

Calling for a national consensus to eschew such poll promises, RBI governor Urjit Patel on Thursday warned that such schemes would undermine credit culture and affect incentives for futures borrowers to pay. One unintended consequence, according to industry participants, would be reduced availability of credit to farmers if banks are not capitalised well on time, which could force them to turn towards the unorganised sector.

When the UPA Government announced a farm loan waiver package of Rs 72,000 crore in 2008, a year before the general election, banks were recapitalised in one go.

However, when the Telangana government announced a similar package to help distressed farmers in the state, banks were paid in four-five instalments.    

“It is true that banks don’t have to take a cut. But it all depends on how fast these banks are going to receive money from the state government. Crop loans have a tenure of around one year while agriculture equipment loans have a longer tenure. If banks are not compensated within the tenure of loans, how will they classify them?” asked Devendra Kumar Pant, chief economist and head public finance at India Ratings and Research.

According to the latest data available with RBI, the outstanding gross bank credit to agriculture and allied activities as on February 17, 2017, stood at Rs 9.3 lakh crore.

With a growing chorus across the country for similar packages, Mr Pant said states with weak finances or higher fiscal deficit would have to ultimately cut down their capital expenditure if the size of the loan waiver was huge.

“This will be really regressive,” he warned.