06/04/2017 3:46 PM IST | Updated 06/04/2017 5:48 PM IST

Farm Loan Waivers Are A Moral Hazard, Undermine Honest Credit Culture, Warns RBI Governor Urjit Patel

The comments come in the backdrop of UP CM Yogi Adityanath waiving Rs 36,359 crores in loans of over 2.15 crore farmers

Danish Siddiqui / Reuters

Reserve Bank of India governor Urjit Patel didn't mince his words on the potential dangers of granting farm loan waivers which he termed a "moral hazard" that could ultimately throw up fiscal challenges for the nation's balance sheet.

On Thursday, while addressing media on RBI' bi-monthly policy briefing, Patel said that economically speaking, the practice of farm waivers "undermines an honest credit culture, impacts credit discipline, plugs incentives for future borrowers to repay," and ultimately transfers the responsibility to pay from borrowers to taxpayers.

Patel's remarks are significant as many states have begun the practice of granting farm loan waivers. Earlier this week, in line with BJP's election promise to farmers, newly-appointed UP Chief Minister Yogi Adityanath approved the waiver of ₹36,359 crores in loans of over 2.15 crore farmers. Following Adityanath's move, farmers in drought-hit areas of Bihar are also asking for similar waivers, Maharashtra chief minister Devendra Fadnavis has begun studying the possibility of a loan waiver scheme modeled after UP's scheme, The Telegraph reported.

Patel further added that if on account of farm waivers, the overall government borrowings go up, it adversely impacts the yields on government bonds. That can lead to crowding out of private borrowers as a result of high cost of government borrowing.

"I think we need to create a consensus so that waiver loan promises are eschewed otherwise the sub-sovereign fiscal challenges could eventually affect the national balance sheet," he said.

Separately, Patel also addressed concerns about the stressed assets and non-performing loans of banks and said the RBI has been "aggressively" preparing for an orderly resolution of the stressed balance sheets of banks, starting with the weakest ones.

The next steps in NPA resolution includes oversight from Promoted Corrective Action (PCA) and a new enforcement department that has begun operations this wee, he said.

Terming the continuing strain of bank losses as "costly for the economy," he said the measures RBI will announce soon along with institutional strengthening "will engender confidence in the banking system, restore corporate demand, and put the country back on the path of healthy bank credit."