Mumbai: Reserve Bank Governor Urjit Patel on Thursday cautioned that loan waiver schemes "engender moral hazard", undermining honest credit culture and impairing incentives for borrowers to repay bank loans.
The comment comes against the backdrop of recent decision by the UP government to waive Rs 36,000 crore in farm loans and increasing demand from politicians for similar concessions in other parts of the country.
"I think it (loan waiver schemes) undermines an honest credit culture. It impacts credit discipline. It (impacts) incentives for future borrowers to repay. In another words, waivers engender moral hazard," he said after announcing the first bi-monthly monetary policy for 2017-18.
Debt waivers also entail transfers from taxpayers to borrowers, he said.
"If on account of this overall government borrowing goes up, yields on government bonds also get impacted. Thereafter, it can also lead to crowding of the private borrowers as higher government borrowing can lead to increasing cost of borrowing for others," he said.
Earlier this week, the newly formed government in Uttar Pradesh, in its first Cabinet meeting, decided to waive crop loans up to Rs 1 lakh, totalling a staggering Rs 36,359 crore.
The move will benefit over 2.15 crore farmers, besides 7 lakh others who had secured loans which turned into non-performing assets (NPAs).
The Yogi Adityanath cabinet 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. The decision of waiver was made against the backdrop of electoral promise made by BJP if it is elected to power.
"I think we need to create a consensus such that loan waiver promises are eschewed, otherwise such sovereign fiscal challenges in this context could eventually affect the national balance sheet," Patel said.
On Wednesday, Maharashtra Chief Minister Devendra Fadnavis said the state government will study the Uttar Pradesh model of farm loan waiver.
Speaking in the Legislative Assembly, where Shiv Sena and BJP members demanded that the state government announce a loan waiver for distressed farmers, Fadnavis had said, "we will study how Uttar Pradesh will raise such a huge amount."
