Politicizing Loan Waivers

One of the populist ways to electoral victory is the waiver of farm loans that yield immediate and considerable fincial benefits to borrowers (who are also voters) but do great harm to banks and other fincial institutions that provide loans. Soon after the remarkable BJP victory in Uttar Pradesh, BJP president Amit Shah declared that a loan waiver to farmers would be the first decision to be taken by the new Cabinet in Uttar Pradesh. The BJP’s Uttar Pradesh election manifesto had promised to waive the harvesting loan of small and margil farmers. This is a clear case of a political party (not the government, mind you) using public money to give benefits to voters that are calculated to win votes. But this is not the only time that this has happened. It will be recalled that the Opposition in Maharashtra had piled pressure on the BJP-led Devendra Fadvis government to announce a complete waiver on farm loans in the State. Thereafter, there were reports that the Congress-led Kartaka government too had written to the Centre seeking assistance for a debt-waiver programme. This may an easy way to win votes, but it is something that will do irreparable harm to credits and loans in India. What will inevitably happen is that almost everyone taking a loan from a bank will do everything possible to find ways of not repaying such loans. And a government that has used the trick of loan waivers to win elections will find it extremely difficult to ensure any discipline in the business of loan repayments, thereby vastly increasing the non-performing assets (NPAs) of banks. State Bank of India chief Arundhati Bhattacharya has done well to sound a warning on loan waivers. But is the government in a mood to listen despite the harm that loan waivers do to the system?