RBI monetary policy: Urjit Patel warns against loan waivers, says they are a moral hazard

Even as various state governments are gearing up to waive off farm loans following the foot steps of the Uttar Pradesh government, Reserve Bank of India (RBI) governor Urjit Patel has flayed the practice saying such moves kill the credit culture and discipline.

In the press conference held after the announcement of the monetary policy committee's first statement this financial year, Patel said such farm loan waivers negatively impact the credit culture and discipline of the borrowers.

RBI Governor Urjit Patel. PTI

RBI Governor Urjit Patel. PTI

"Farm loan waiver undermines honest credit culture and entails transfer of taxpayers' money. It is a moral hazard," he said. He also said there is a need to create a consensus so that politicians avoid making such farm loan waiver promises.

The governor's strong comments come after the Uttar Pradesh government under chief minister Yogi Adityanath has announced waiver of Rs 36,359 crore worth farm loans, including bank NPAs worth Rs 5,630 crore.

The loan waiver in the state was in fact an election promise made by Prime Minister Narendra Modi.

The Uttar Pradesh government's decision has attracted criticism from various quarters.

"By offering the Rs 36,000 crore waiver Yogi Adityanath has certainly scored a big political point, but at the cost of good economics," Firstpost's financial editor Dinesh Unnikrishanan said in an article.

As a cascading effect of the UP government's decision, opposition parties in Maharashtra have been putting pressure on Chief Minister Devendra Fadnavis to waive off around Rs 30,000 crore worth of farmer loans.

Patel is not the first RBI governor to criticise farm loan waivers. In 2014, the then RBI governor Raghuram Rajan had also raised questions about the utility of such decisions.

“How effective these debt waivers have been? In fact the studies that we have typically show that they have been ineffective. In fact they have constrained the credit flow post waiver to the farmers," Rajan had said.

Updated Date: Apr 06, 2017 16:12 PM

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