RBI: LOAN SOPS WRECK HONEST CREDIT CULTURE

Stating that farm loan waiver would undermine honest credit culture and credit discipline in the economy, RBI governor Urjit Patel on Thursday stressed the need for a consensus to eschew such poll promises.

Stating that farm loan waiver would undermine honest credit culture and credit discipline in the economy, the RBI governor Urjit Patel on Thursday stressed the need for a consensus to eschew such poll promises. The governor’s comment comes in the backdrop of the massive loan waiver announced by the UP government just a few days back.

“There are several conceptual issues if one were to put one's hat as an economist on. I think it undermines an honest credit culture, it impacts credit discipline... It impacts incentives for future borrowers to repay. In other words waivers engender moral hazard,” he said after announcing the first bimonthly monetary policy statement for 201718.

According to him, if the overall government borrowing goes up due to loan waivers, the yields on government bond would also get impacted. This can lead to crowding of the private borrowers as higher government borrowing can lead to increase in cost of borrowing for others.

“It means transfer of money from tax payers to borrowers. I think we need to create a consensus such that loan waiver promises are eschewed.

“Otherwise, sub-sovereign fiscal challenges in this context could eventually affect national balance sheet,” he added.

Fulfilling one of its poll promises, the new government in UP in its first cabinet meeting announced farm loan waiver to the tune of `36,359 crore, which is expected to benefit 85 lakh farmers in the state. Congress, which won Punjab polls, has also promised farm loan waiver in its election manifesto.

The announcement made by UP government has triggered similar demands from various political parties across India.

Maharashtra Chief Minister Devendra Fadnavis said that his government would study the UP model of farm loan waiver.