Loan waivers add to fiscal burden of states: RBI

Farm loan waivers announced by state governments add to their fiscal burden and "vitiate credit culture", the Reserve Bank said today.

"While these loan waivers could alleviate the immediate debt burden of financially distressed farmers, it is essentially a transfer from tax payers to borrowers with an adverse bearing on the fiscal viability of states," RBI said in a report on State Finances 2016-17 released today.

It said loan waivers impact credit discipline, vitiate credit culture and disincentivise borrowers from repayment, engendering moral hazard with expectations of future bailouts.

If overall government borrowings increase due to issuance of debt relief bonds by state governments, yields on state development loans (SDL) may firm up posing a higher interest burden in the future, it warned.

"Concomitantly, it can also crowd out private borrowers, given the finite pool of investible resources in the economy,"

RBI said in the report.

The comments come on the heels of Uttar Pradesh Chief Minister Yogi Adityanath waiving crop loans of up to Rs 1 lakh, totalling a staggering Rs 36,359 crore.

The government 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.

RBI Governor Urjit Patel had warned against state governments waiving farm loans and said that such sops undermine honest credit culture and impair incentives for borrowers to repay bank loans.

"I think it undermines an honest credit culture. It impacts credit discipline. It (impacts) incentives for future borrowers to repay. In another words, waivers engender moral hazard," Patel had said after announcing the first bi-monthly monetary policy for 2017-18 on April 6.

State Bank of India's Chairman Arundhati Bhattacharya had also expressed reservation over farm loan waiver saying such schemes may disrupt credit discipline among borrowers.

"We feel that in case of a farm loan waiver there is always a fall in credit discipline because people who get the waiver have expectations of future waivers as well. As such, future loans given often remain unpaid," Bhattacharya had said.

There have been demands for crop loan waiver in Punjab, Maharashtra and Tamil Nadu as well.