Loan waiver beneficiaries may shift to informal sources of credit: RBI study

It says formal institutions show reluctance to lend to such farmers

While the State government’s recent announcement of a repayment model to nationalised banks for the farm loan-waiver scheme would no doubt help reduce farmers’ debt, there are possibilities of such farmers shifting to informal sources of credit such as moneylenders owing to reluctance of formal institutions to lend to them, according to the Reserve Bank of India’s latest study.

The RBI’s study ‘State Finances: A Study of Budgets,’ released in July, examined past experiences with loan-waiver schemes in several States, and found that “debt relief helps in reducing household debt but there appears to be no evidence of increase in investment and productivity of beneficiary households”.

Loan waiver beneficiaries may shift to informal sources of credit: RBI study

The research said farmers might face future credit constraints owing to the reluctance of formal institutions to lend to them following implementation of the loan-waiver scheme. This in turn would force farmers to shift to informal sources of credit. Seven States have announced the farm loan-waiver scheme in recent years.

It also noted that “debt waiver is given to farmers differentially, that is, on the basis of their land holdings, and the probability of obtaining credit post waiver was found to be higher for non-beneficiary farmers than for beneficiary farmers in the year of implementation of debt waivers.”

It said the farm loan waiver might cleanse banks’ balance sheets in the short term, but may disincentivise banks from lending to agriculture in the long term.

“Consequently, loan waivers can have a dampening impact on rural credit institutions,” it added.

Besides, it might not just be loan waivers that are detrimental to the government balance sheet; it is the fiscal volatility emanating from random policy shocks that can have an even more enduring impact. The loan waivers spill over into coming fiscal years and continue to squeeze fiscal space. It would also curb developmental expenditure, the study said.

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Printable version | May 29, 2020 4:38:07 PM | https://www.thehindu.com/news/national/karnataka/loan-waiver-beneficiaries-may-shift-to-informal-sources-of-credit-rbi-study/article24786864.ece

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