Loan Waiver

What is a Loan Waiver?

(Contributed by Sushmita)

A Loan Waiver is the waiving of the real of potential liability of the person or party who has taken out a loan through the voluntary action of the person or party who has made the loan.

Why in news?

  • Recently the new CM of Uttar Pradesh has expressed his intent to waive off farm loans and ever since due to farmers’ agitation and suicides the same has snowballed in other states as well.(e.g.: Maharashtra)
  • Recent  judgement of Madras HC directed TN government to waive farm loans of drought affected areas.
  • According to a report, Farm loan waivers will amount to 2 per cent of gross domestic product (GDP) by the 2019 polls

Previous instances and its result:

In 2008, Agriculture Debt Waiver was announced which included the complete waiver of loans given to small and marginal farmers.

A study showed increase in loan repayment default after the Central government announced this farm loan waiver , a year before general election. Honest farmers repaying the loan also turned defaulters after the waiver.

Why a farm Loan waiver is required?

  • Agriculture in India has been facing many issues — fragmented land holding, depleting water table levels, deteriorating soil quality, rising input costs, low productivity.
  • vagaries of the monsoon.
  • Output prices may not be remunerative.
  • Farmers are often forced to borrow to manage expenses.
  • Also, many small farmers not eligible for bank credit borrow at exorbitant interest rates from private sources.

All these may add to farmers’ misery finally leading to their suicides. In such situations Loan waivers by the state provide some relief to farmers’ distress.

What are the consequences ?

  • writing of loans as a blanket policy, creates a moral hazard for borrowers, who will have no incentive to stick to credit discipline
  • this will in turn disruptive entire credit system
  • In addition, it also makes a sharp dent in the finances of the government that finances the write-off. Increased borrowing will also lead to crowding out of private investment
  • Frequent write offs will prompt banks to invest in alternatives such as RIDF instead of reaching out to individual farmers
  • farmers may be once again be forced into the clutches of informal money lenders.
  • Recent Madras HC judgement can be cited in other courts to seek Loan waivers and may have domino effect

What needs to be done?

Loan waivers are short term solution for farmers distress and should not be seen as a tool of competitive populism. Holistic approach:


  • The Centre and states need to work together to evolve a farm loan model which protects both farmers and banks without bringing politics into it. This is the essence of “cooperative federalism”


  • policymakers must now remove the structural bottlenecks in India’s farm economy-holistic solutions to farmer distress – creation of non-farm jobs and enhancement of farm incomes
  • increase in state’s investment in areas such as irrigation, water conservation, better storage facilities, market connectivity and agricultural research
  • Need for national agriculture policy. There is a need for an integrated approach – one that addresses source sustainability, land use management, agricultural strategies, demand management and the distribution and pricing of water
  • small and marginal farmers need to be given alternative livelihood through employment in manufacturing and services sector

No comments.

Scroll Up