The four states that have announced farm loan waiver are working on a mechanism to issue special bonds directly to the banks, sources said. “While discussions between the state governments and the Reserve Bank of India are still on, one of the probable solutions that they are looking at is issuing bonds directly to the banks,” a source with knowledge of the development told FE. The pricing of the bonds has not yet been finalised. This would allow the states to fund the scheme without increasing the issuance of state development loans (SDL) securities, which would have pushed up not only the states’ cost of borrowing, but also the yields on the government bonds. On an average, the yields on the SDL securities trade 70-80 basis points higher than the 10-year benchmark bond, which closed at 6.50% on Wednesday.
Uttar Pradesh was the first state to announce farm debt waiver for small and marginal farmers. Since then, Maharashtra, Punjab and Karnataka have followed suit. Farm loan bonds would be different from the SDL securities, where the RBI as the facilitator to the issue of SDLs, has the power to make repayments to SDLs from the Centre’s allocation to the states. For farm-loan bonds, the RBI would have no such role, a senior official at the treasury department of a large public sector bank said.
“This is one of the easiest solutions, and we would have no problem in going ahead with this,” treasury head of another state-run bank said. He said the banks would receive the coupon on the bonds, and the state governments would repay the principal in annual tranches.
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In a recent report, Kotak Economic Research estimated that around Rs 1.6 lakh crore of farm loans (0.9% of the GDP) could come up for waiver. Given the fiscal position of some states and the likely impact of these loans, they may stagger the payout over three to five years, it said. Consequently, slippages to consolidated fiscal deficit in fiscal 2018 will be around 0.2-0.4% of the GDP, it added.
The Centre has maintained a tough stance on farm loan waivers and has said it intends to stick to its fiscal deficit target. In the Union Budget for 2017-18, the fiscal deficit has been pegged at 3.2% of the GDP, lower than 3.5% in the previous financial year. It has laid the onus of funding the farm loan waiver cost on the states.