Perils of loan waivers

Waiving farm loans has led to higher NPA in agriculture

Political parties are once again busy wooing farmers ahead of the upcoming Assembly elections. The Congress, for instance, has promised farm loan waivers in both Haryana and Maharashtra. The incumbent Bharatiya Janata Party (BJP) has not gone that far in Haryana but has promised interest-free loans. It has already implemented a loan waiver in Maharashtra.

Loan waivers do have a clear political motive, and it could even be argued that they also reduce the debt burden and enable farmers to invest, which may increase productivity over time. However, things don’t work that way. Loan waivers create moral hazard and encourage borrowers