RBI said that farm loan waivers destroy the credit culture which may harm the farmers’ interest in the medium to long term and also squeeze the fiscal space of governments to increase productive investment in agriculture infrastructure.
The Reserve Bank of India has underlined that farm loan waivers do not address long-term issues and are more of political expediency. Eight out of ten loan waiver announcements since 2014 were made within 90 days of their respective states’ election results, RBI has pointed out. Highlighting the timing of loan waiver announcements during election cycles, RBI said that the nationwide loan waiver programs of 1990 and 2008 were announced by the central government in the run-up to the parliamentary elections of 1991 and 2009, respectively. In a report reviewing agricultural credit, the RBI has also said that farm loan waivers destroy the credit culture which may harm the farmers’ interest in the medium to long term and also squeeze the fiscal space of governments to increase productive investment in agriculture infrastructure.
It is believed that the economic benefit of loan waiver on households can only be realised if credit allocation to beneficiary households is not impacted. However, in the report, it has been clearly pointed out that the loan waivers do impact the credit flow to agriculture, which could impact both loan performance, as borrowers choose to default strategically, and credit allocation, as banks reallocate lending to lower risk borrower segments. “In the recent period in 2016-17 and 2017-18, NPA level has increased sharply, possibly indicating strategic default arising from the state-level loan waiver announcements,” said the report.
How loan waivers impact agri credit
There is a deceleration in agricultural credit outstanding and agricultural credit disbursements in the years of loan waiver programmes. The reason cited for the decline in such disbursements is the inability of the beneficiary farmers to avail fresh loans from banks till the time the waiver program is implemented. Keeping the above issues in mind, the RBI has recommended the government to avoid loan waivers and to undertake a holistic review of the agricultural policies and their implementation, as well as evaluate the effectiveness of current subsidy policies with regard to agri inputs and credit in a manner which will improve the overall viability of agriculture in a sustainable manner.