Reserve Bank of India Governor Urjit Patel on Thursday said there is a need to create a consensus so that farm loan waiver promises are avoided. This comment comes in the context of political parties promising loan waivers to farmers to win elections.
Patel observed that farm loan waivers undermine honest credit culture. He also cautioned that such waivers could lead to State Governments borrowing more, which in turn may crowd out private sector borrowers.
To a specific question on farm loan waivers, Patel said, “It impacts credit discipline…In other words, waivers engender moral hazard. It also entails, at the end of the day, transfers from tax payers to borrowers.” Due to the waivers, there is less incentive for future borrowers to repay.
Patel said the overall government borrowing also goes up and yields on government bonds will get impacted. It can also lead to the crowding out of private borrowers as higher government borrowing can lead to an increase in the cost of borrowing for others.