Farm Loan Waivers Pose Risk to Inflation, Says RBI Governor Patel

Urjit Patel’s statement comes right after the UP government waived off farm loans worth Rs 36,359 crore.

RBI Governor Urijit Patel. (Photo: Reuters)

A farm loan waiver undermines an “honest credit culture”, affects credit discipline and poses yet another risk to inflation, Reserve Bank of India (RBI) Governor Urjit Patel said, two days after the Uttar Pradesh government announced one in the state.

It blocks incentives for future borrowers to repay and can crowd out private borrowers, Patel said at a media briefing in Mumbai following the monetary policy announcement on Thursday. If the government’s borrowing goes up as a result of such a waiver, yields on government bonds also go up, he said.

We need to create a consensus such that loan waiver promises are eschewed. Otherwise, sub-sovereign fiscal challenges will affect the national balance sheet.

Urjit Patel, RBI Governor

Keeping its election promise, the newly elected Bharatiya Janata Party (BJP) government in Uttar Pradesh waived farm loans worth Rs 36,359 crore in the state for around 2.15 crore farmers.

Prime Minister Narendra Modi, during his election campaign in the state, had promised that his party would waive loans of small and marginal farmers if voted to power.

This triggered similar demands in states like Maharashtra and Tamil Nadu. In fact, Maharashtra Chief Minister Devendra Fadnavis said his government would study how the UP loan waiver is being financed.

Earlier, State Bank of India Chairman Arundhati Bhattacharya had said at a media briefing that waiving agriculture loans will make it tougher for banks to continue lending to farmers. The head of the country’s largest bank had also flagged repayment concerns.

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(The article was originally published on BloombergQuint.)