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Loan waivers and bank credit reflections on the evidence and the way forward

Author

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  • Sudha Narayanan

    (Indira Gandhi Institute of Development Research)

  • Nirupam Mehrotra

    (National Bank for Agriculture and Rural Development)

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.

Suggested Citation

  • Sudha Narayanan & Nirupam Mehrotra, 2019. "Loan waivers and bank credit reflections on the evidence and the way forward," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2019-038, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2019-038
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    File URL: http://www.igidr.ac.in/pdf/publication/WP-2019-038.pdf
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    References listed on IDEAS

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    1. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
    2. Ministry of Finance, Government of India,, 2017. "Economic Survey 2016-17," OUP Catalogue, Oxford University Press, edition 2, number 9780199477661.
    3. Saptarshi Mukherjee & Krishnamurthy Subramanian & Prasanna Tantri, 2018. "Borrowers' Distress and Debt Relief: Evidence from a Natural Experiment," Journal of Law and Economics, University of Chicago Press, vol. 61(4), pages 607-635.
    4. Martin Kanz, 2016. "What Does Debt Relief Do for Development? Evidence from India's Bailout for Rural Households," American Economic Journal: Applied Economics, American Economic Association, vol. 8(4), pages 66-99, October.
    5. Xavier Giné & Martin Kanz, 2018. "The Economic Effects of a Borrower Bailout: Evidence from an Emerging Market," The Review of Financial Studies, Society for Financial Studies, vol. 31(5), pages 1752-1783.
    6. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    7. Ramakumar, R., 2013. "India’s Agricultural Debt Waiver Scheme, 2008," Review of Agrarian Studies, Foundation for Agrarian Studies, vol. 3(1), July.
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    Cited by:

    1. Mahambare, Vidya & Dhanaraj, Sowmya & Mittal, Pragati, 2022. "The political budget cycles in the presence of a fiscal rule: The case of farm debt waivers in India," Journal of Policy Modeling, Elsevier, vol. 44(3), pages 701-721.
    2. MVK, Jagannath & Maitra, Debasish, 2023. "Do election cycles, political stability, and government effectiveness matter for the risk of banks? Evidence from Indian banks," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    3. Sowmya Dhanaraj & Vidya Mahambare & Pragati, 2021. "Are India’s farm debt waivers a political tool that impacts government finances?," Working Papers 2021-211, Madras School of Economics,Chennai,India.
    4. Muhammed Ahmed Ibrahim & Abubakar Adamu Magaji & Fatima Muhammad Abdulkarim & Salisu Yahuza, 2020. "Mediating Influence of Islamic Microfinance on agricultural Antecedents and Agribusiness Performance in Jigawa state, Nigeria," Technology audit and production reserves, Socionet;Technology audit and production reserves, vol. 6(4(56)), pages 35-40.
    5. Mukherjee, Atri & D., Suganthi & Kumar, Rishabh & Bajaj, Priyanka, 2023. "Effective Aggregate Support to Indian Agriculture," MPRA Paper 118321, University Library of Munich, Germany.

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    More about this item

    Keywords

    India; loan waiver; agriculture; debt; formal credit; default;
    All these keywords.

    JEL classification:

    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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