The culture of loan waivers must end: Raghuram Rajan

Politicians must put an end to the culture of loan waivers, normally offered as a part of pre-poll sops, as it does more harm to the system than offer any help, said Reserve Bank of India Governor Raghuram Rajan.

Recently, politicians from the newly formed States of Telangana and Andhra Pradesh announced a loan-waiver scheme before assembly elections in these States.

“Clearly this is another form of transfer but again waiving loans does widespread damage. It does damage to the credit culture… it makes it hard to let the flow of credit to happen,” Rajan added.

He cited studies on how loan waivers disrupt credit flow and makes the recipients only better off in the short-run but worse off in the long term.

“I think the message that should be sent widely and clearly is to not do loan waivers,” Rajan said. He instead suggested other measures such as loan restructuring for people affected by calamities as possible alternatives to loan waivers.

He also cautioned that such waivers end up benefiting the wrong people instead of the intended recipients and added that such doles (in other forms) must be more targeted.

This was, in fact, borne out in the 2008 loan waiver announced by the UPA-I government. ₹71,000 crore was later found to have been massively misappropriated.

The RBI Governor also added that interest subvention is another practise that needs to be checked.

Subvention is a scheme where the Government encourages lenders to give credit at cheaper rates than market rates to borrowers and then compensates the lenders.

“To my mind, broad-based interest subventions distort the price of credit and lead to misuse. They also lead to wrong kind of information.

“For example, if you incentivise short-term loans, you don’t get long-term investments,” he added.

He suggested using Direct Benefits Transfer instead of encouraging interest subventions.

“If you want to incentivise a particular activity of, say, small and marginal farmers, give them direct transfers and let them use it in whichever way they want.

“Do not force them to get into borrowing by offering them lucrative benefits,” Rajan added.