Farm loan waiver engenders a moral hazard, says Urjit Patel

Farm loan waiver engenders a moral hazard, says Urjit Patel: Debt waivers also entail transfers from taxpayers to borrowers, says Patel...

Excerpts:
"Reserve Bank of India (RBI) Governor Urjit Patel on Thursday expressed displeasure over the current spate of farm loan waivers and said these adversely affect the culture of repayments as well as put a severe burden on the exchequer.

“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 a moral hazard,” he said, after announcing the first bi-monthly monetary policy for 2017-18."



RBI focus on national balance-sheet
This refers to Abhijit Lele’s brief report “Urjit Patel slams loan waivers” (Business Standard, April 7). RBI Governor’s observation “I think it undermines an honest credit culture. It impacts incentives for future borrowers to repay. In other words, waivers engender a moral hazard…” echoes the gist of RBI’s consistent stand on loan waivers which was articulated on several occasions in the past including at the time of  the introduction of Agricultural and Rural Debt relief Scheme (ARDRS), 1990. Centre and state governments, on most of the occasions, went ahead with their political agenda of such waivers which are partly responsible for spread of the malignancy of financial indiscipline to other sectors.
This time around, RBI has given the message loud and clear and the reference to ‘national balance-sheets’ should wake up the policy makers and opinion makers to the reality of the situation. When taxpayers money is diverted to purposes other than those for which taxes are collected and budgeted, governments will have to borrow to meet the extra burden which will create imbalances in fiscal management.  Many popular schemes like ‘freebies’, tax concessions to corporates, and refusal to bring certain sectors like agriculture within tax net are already making the budget exercises at Centre and states level slip out of the accepted contours of financial discipline.
While RBI advice to move towards a consensus to eschew politically motivated agricultural loan waivers is timely and welcome and needs to be taken seriously, simultaneous efforts are necessary to provide relief to genuine borrowers. Such supports would include providing crop insurance, ensuring all linkages for getting timely inputs at reasonable costs, irrigation facilities, cost-related farm gate price, storage  and transportfacilities for perishable farm products and so on at reasonable costs.
M G WarrierMumbai 

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