The Maharashtra government announced a Rs 35,000 crore waiver scheme last week, potentially impacting the state’s credit culture and finances. It also comes despite past advisories issued by the Reserve Bank of India (RBI) and several working groups against the practice.So far, the state has collected information about around 30 lakh farmers, including 20 lakh non-defaulters, which will impose a heavy burden on the state exchequer. The state has more than 1.6 crore farmers in total.The waiver for defaulters alone is estimated to cost about Rs 20,000 crore, while the incentive of Rs 50,000 promised to farmers who have been regularly repaying their loans will require another Rs 15,000 crore, taking the total outgo to roughly Rs 35,000 crore.The state government maintains that its finances remain robust and it is prepared to absorb the fiscal burden of what it calls a necessary step to safeguard the interests of the farming community. However, Maharashtra is not an outlier, and the increasing trend of loan waivers has wider negative implications.Farm waivers so farAfter two nationwide waivers initiated by the Central government since 1990, farm loan waivers have seen an unprecedented increase since 2014-15, driven by announcements from state governments.The policy of farm loan waivers is grounded in the rationale of alleviating the debt overhang of beneficiaries, thus enabling them to undertake productive investment and boost real economic activity.While the risk to farmers’ income — nature’s risk as well as market risk — can cause significant distress, loan waivers, which often occur around elections, are “not the panacea to address the underlying risks”, according to the RBI. In reality, the practice can undermine the credit culture, adversely affect state finances, and harm farmers’ interests in the medium to long term.Story continues below this adCentral and state governments have spent a whopping Rs 3 lakh crore in the last 35 years towards various farm loan waiver schemes.Also in Explained | Why are bad debts rising in Maharashtra’s farm sectorGenerally, incumbent state governments see such announcements as giving them an obvious political edge for elections. An RBI Report of the Internal Working Group to Review Agricultural Credit in 2019 pointed out that “The nationwide loan waiver programs of 1990 and 2008 were announced by the Union Government in the run-up to the parliamentary elections of 1991 and 2009, respectively. Similarly, eight out of ten loan waiver announcements since 2014 were made within 90 days of their respective states’ election results.”Centre kicks off the exerciseThe first major programme on farm loan waiver, the Agriculture and Rural Debt Relief Scheme, 1990 (ARDRS), was undertaken nationwide in 1990, followed by another nationwide loan waiver in 2008, viz., Agricultural Debt Waiver and Debt Relief Scheme, 2008 (ADWDRS).The ARDRS programme, which came into force on May 15, 1990, covered short-term loans and overdue instalments of term loans outstanding to public sector banks (PSBs) and Regional Rural Banks (RRBs) as on October 2, 1989. The maximum relief amount under the program was Rs 10,000 per farmer, and there was no differential treatment based on the size of their landholding.Story continues below this adThe 2008 ADWDRS programme was broader in its coverage of institutions, including scheduled commercial banks (SCBs), RRBs, co-operative credit Institutions (both urban and rural) and Local Area Banks. The programme targeted higher relief for small and marginal farms (with a landholding of up to five acres) vis-à-vis other farmers.Also Read | Explained: The arguments for and against a bad bankThe 1990 waiver programme cost Rs 10,000 crore (Rs 50,600 crore at 2016-17 prices using the GDP deflator to account for inflation) and the 2007-08 one cost Rs 52,500 crore (Rs 81,200 crore at 2016-17 prices using the GDP deflator), according to the report submitted by the RBI’s Internal Working Group.States join the partySince 2014-15, ten states have announced loan waiver programmes of an aggregate Rs 2.4 lakh crore (1.4% of the 2016-17 GDP at current prices) — significantly higher than the two nationwide debt waiver programmes, according to the RBI.Farm loan waivers across statesStateYearAmount (Rs crore)Andhra Pradesh2014-1524,000Telangana2014-1517,000Maharashtra2017-1834,020Uttar Pradesh2017-1836,360Punjab2017-1810,000Karnataka2018-1944,000Rajasthan2018-1918,000Madhya Pradesh2018-1936,500Chhattisgarh2018-196,100Maharashtra2019–2022,000Telangana202431,000Jharkhand20242,000–3,000Source: RBI Working Group reportStory continues below this adRajasthan, Madhya Pradesh and Chhattisgarh announced new loan waiver programmes in 2018-19 to the tune of Rs 18,000 crore (1.9% of the Gross State Domestic Product), Rs 36,500 crore (4.5% of GSDP) and Rs 6,100 crore (1.7% of GSDP), respectively.Karnataka expanded its loan waiver programme from Rs 18,000 crore announced in 2017-18 to Rs 44,000 crore (3.4% of GSDP) in 2018-19, the working group report said.The impact of loan waivers on states’ Budgets is typically staggered over three to five years, either due to phased rollouts or by clearing bank dues over multi-year payouts. This impact varies widely across states, ranging from 0.1% of the GSDP in Andhra Pradesh and Tamil Nadu to 1.8% of the GSDP in Chhattisgarh in 2018-19. In the 2019-20 Budget Estimates, states allocated between 0.1 and 2% of their GSDP to farm loan waivers, says the RBI report on state finances.Alongside a sharp deceleration in growth of agricultural credit outstanding, a decline in agricultural credit disbursements was observed in the years of loan waiver programmes, with growth bouncing back in subsequent years, the central bank said.Story continues below this adThe central bank has discouraged loan waivers on various occasions, noting that the practice affected the credit culture, as many borrowers withheld repayment in anticipation of a loan waiver. This adversely affects borrowers’ credit history and their prospects of availing fresh loans for agricultural purposes.Also in Explained | How waived loans impact statesThe deterioration in the credit culture is evident from the high level of gross non-performing assets (NPA), or loans on which borrowers have defaulted. NPAs in agriculture stood at 8.44% as of March 31, 2019. Banks may also become averse to fresh lending in the face of waivers.According to the RBI working group report, data show that the level of NPAs increased for all states that announced waivers in 2017-18 and 2018-19. On the other hand, almost all other states (except Bihar, Odisha and Haryana) have shown either no material change in their NPA level or registered a decline between 2016-17 and 2017-18.Taken together, this could indicate a moral hazard, with borrowers defaulting strategically in anticipation of a loan waiver.Story continues below this adFormer RBI Governors have also criticised the policy. Raghuram Rajan had said, “The question is whether the flows to farmers are best affected by waiving loans. After all, there is only a subset of farmers who get those loans. And so, it often goes to the best connected rather than those who are most poorly off,” Rajan said.Former RBI Governor Urjit Patel said, “I think it undermines an honest credit culture. It impacts credit discipline. It (impact) incentives for future borrowers to repay. In other words, waivers engender moral hazard.”The RBI’s internal group report estimated that about a third of the overall fiscal slippage of 13 basis points in revenue expenditure during 2017-18 may be attributed to loan waivers (around 5 basis points). Further, waivers squeeze the governments’ fiscal resources, which could have been utilised to increase productive investment in agriculture infrastructure, the RBI working group said.Alternative solution for farmersAccording to an SBI research report, since 2014, of approximately 3.7 crore eligible farmers, only around 50% received the loan waiver amount by March 2022.Story continues below this adDespite much hype and political patronage, states’ farm loan waivers have failed to bring respite to their intended subjects, sabotaging credit discipline in select geographies and making banks and financial institutions wary of further lending, the SBI report concluded.Instead, it pitched for an income support scheme, arguing that with a lower spending of Rs 50,000 crore, a larger benefit can be accrued to the target groups. “Farm loan waiver is not the solution for this problem. We need to increase farmers’ income. Hence, there is a dire need to introduce income support schemes at an all-India level,” the SBI report said.