Working Paper: Loan Waivers and Bank Credit Reflections on the evidence and the way forward

No: WP-2019-038

Author: Sudha Narayanan and Nirupam Mehrotra

Title: Loan Waivers and Bank Credit Reflections on the evidence and the way forward

Abstract: In the past decade, farm loan waivers have become a policy instrument to alleviate financial distress of farmers. Despite agreement on the theoretical rationale for such debt forgiveness and its deep contextual relevance, many fear that in the long run, loan waivers might vitiate the repayment culture in the farm sector and undermine the financial status of banks. At present, implications of large-scale loan waivers rests on limited evidence, although empirical work in this area has been growing. This papers reviews and synthesizes existing research and available data on the implications of loan waivers, especially for the flow of credit to farmers from banks. This paper concludes that even if loan waivers are an inappropriate strategy to support farm incomes in sustainable ways, the wide-ranging negative impacts on the formal banking sector are perhaps overstated. The paper identifies areas that need further research and outlines possible ways forward in designing a debt relief policy.

Keywords: India, loan waiver, agriculture, debt, formal credit, default

JEL Code: Q14, E5