Farm loan waivers: With Maharashtra also announcing a farm loan waiver last week, several other state governments are likely to waive off about Rs 2,57,000 crore of farmers’ loans before 2019 Lok Sabha elections, a global banking group has said. According to a Bank of America Merrill Lynch (BofA-ML) report, loan waivers to farmers will amount to about 2 percent of gross domestic product (GDP) by the 2019 general elections, since other states are expected to follow Maharashtra and Uttar Pradesh governments.
“We grow more confident of our call that farm loan waivers will spread across states after Maharashtra followed Uttar Pradesh in waiving farm loans on Saturday. This begs the question, how much of farm loans will eventually get waived? $40 billion, or 2 percent of GDP, in our view, in the run-up to the 2019 general elections. This covers bank loans to farmers with up to five acres of land,” it was quoted to have said by Indian Express.
“We assess that the Ministry of Finance will eventually have to come up with an UDAY bond-type solution that will securitise banks’ farm loans into long-dated non-SLR state government paper,” Merrill Lynch was further quoted as saying by the paper. “It may affect credit culture, although we recognise that a good part of farmer debt arose on rural stress from poor harvests,” it added.
“On balance, farm loan waivers support our standing call of playing consumption over investment, as they will help stimulate rural demand, especially if monsoons water a good crop,” it said. “We expect almost all states to write off about $40 billion of farm loans.”
The Devendra Fadnavis Government in Maharashtra waived off loans Rs 30,000 crore loans owed by farmers, with up to five acres of land by October, last Saturday.
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Even though, the Centre has said that state governments have to fund their own farm loan waivers, this is not possible without disrupting bond markets, the Indian Express report further said.
On whether the farm loan waiver will impact rural credit culture, BofA-ML report said, “It is bound to, in our view, although we recognise that a good part of farmer debt arose on rural stress from poor harvests. The UPA government had waived 1.3 per cent of GDP of farm loans in 2008. Farm loan waiver would prove counter-productive for the RBI’s measures to clean up bank balance sheets.”