Workers harvest green peas by hand at a field in Amritsar, Punjab, India (Photographer: Dhiraj Singh/Bloomberg)

BofA ML Warns Of A Surge In Farm Loan Waivers Ahead Of 2019 Elections

With Maharashtra following Uttar Pradesh on farm loan waiver, a report by Bank of America Merrill Lynch on Monday warned that $40 billion, equivalent to 2 percent of GDP, will be written off in the run-up to the 2019 general elections.

"We grow more confident of our call that farm loan waivers will spread across states after Maharashtra followed Uttar Pradesh," its analysts said in a note.

Underlining that credit culture will be impacted by such populist moves, it estimated the total loans to be waived will be over $40 billion or 2 percent of the GDP by 2019.

Such moves will also be counter-productive to the Reserve Bank of India's efforts at cleaning up the NPA-saddled bank balance sheets, it warned.

The BJP-led Maharashtra government announced a Rs 30,000-crore debt waiver scheme on Saturday, wherein farmers with less than 5 acres of land will benefit. The move follows a Rs 36,000-crore farm loan waiver in Uttar Pradesh. The RBI has been repeatedly raising flag on loan waiver, calling it a "moral hazard".

"Waivers undermine an honest credit culture...It leads to crowding-out of private borrowers as high government borrowing tend to (impose) an increasing cost of borrowing for others," Governor Urijit Patel has said earlier. Analysts at the brokerage said even though the Centre has said that states will have to make provisions for themselves, the Ministry of Finance will have to take care of it by floating bond instruments similar to UDAY scheme.

"Although the Ministry of Finance has said that states have to fund their own farm loan waivers, that is scarcely possible without disrupting bond markets," it said.

The previous UPA government had announced an over Rs 60,000 crore debt waiver for the agricultural sector in 2008.