Loan waiver schemes undermine honest credit culture: Patel

Two days after the Yogi Adityanath-led Uttar Pradesh government waived farm loans to the tune of Rs 36,000 crore and the Madras High Court ordered all farm loans in drought-hit Tamil Nadu be waived, Reserve Bank Governor Urjit Patel on Thursday cautioned that loan waiver schemes "engender moral hazard", undermining honest credit culture and impairing incentives for borrowers to repay bank loans.

"I think it (loan waiver schemes) undermines an honest credit culture. It impacts credit discipline. It (impacts) incentives for future borrowers to repay. In other words, waivers engender moral hazard," he said after announcing the first bi-monthly monetary policy for 2017-18.

Debt waivers also entail transfers from taxpayers to borrowers, he said.

"If on account of this overall government borrowing goes up, yields on government bonds also get impacted. Thereafter, it can also lead to crowding of the private borrowers as higher government borrowing can lead to increasing cost of borrowing for others," he said. Earlier this week, the newly formed government in Uttar Pradesh, in its first Cabinet meeting, decided to waive crop loans up to Rs 1 lakh, totalling a staggering Rs 36,359 crore.

The move will benefit over 2.15 crore farmers, besides 7 lakh others who had secured loans which turned into non- performing assets (NPAs).

The Yogi Adityanath cabinet decided to float Kisan Rahat Bonds for raising Rs 36,359 crore required for waiving loans of small and marginal farmers who form 92.5 per cent of the total 2.30 lakh farmers in the state.