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After RBI, Nabard calls farm loan waivers a 'moral hazard'

BT Online     April 12, 2017

After RBI governor Urjit Patel disagreed with the practice of loan waivers during the first monetary policy of this fiscal last week, National Bank for Agriculture and Rural Development (Nabard)  too has termed farm loan waivers as "moral hazard" and said such facilities should be targeted only to the needy.

"Debt waivers create a moral hazard from a credit repayment perspective and we cannot have omnibus waivers," chairman Harsh Kumar Bhanwala said, a week after the UP government announced a Rs 36,000-crore farm loan waiver package.


With demands for similar measures on in other states like Haryana, Maharashtra and Tamil Nadu, Bhanwala said there is a need to look at the moral hazards which such schemes create and targeting such schemes only to the needy farmers.

Every time a debt waiver is announced, it is taxpayers' money which is used to help bail out the farmers, he said.

The newly formed Uttar Pradesh government on April 5 announced a farm loan waiver of Rs 36,000 crore.

Uttar Pradesh Chief Minister Yogi Adityanath announced loan waiver of up to Rs 1 lakh, which would benefit farmers in the state.

The decision was taken at the first Cabinet meeting of the newly formed Uttar Pradesh government.


Uttar Pradesh has close to 2.3 crore small and marginal farmers who owe about Rs 62,000 crore to banks and cooperatives.

In its first bi-monthly monetary policy statement for 2017-18 on April 6, RBI governor Urjit Patel said farm loan waiver undermines honest credit culture, impacts credit discipline.

"A farm loan waiver undermines an honest credit culture and impacts credit discipline. It plugs incentives for future borrowers to repay. In other words, it engenders moral hazard and also entails transfer from tax payers to borrowers, " Patel said in a post monetary policy conference.

Expressing disagreement with the practice of the government, the governor said, "I think we need to create a consensus that farm loan waiver promises are eschewed. Otherwise, sub-sovereign fiscal challenges in this context could eventually affect the national balance sheet."

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