Farm loan waivers are "populist actions" and lead to disruption of credit discipline among borrowers, says a report as Maharashtra became the latest in the list of states writing off farmers' loans.
Uttar Pradesh and Punjab had announced such measures recently.
According to Kotak Institutional Equities, frequent occurrence of such populist actions may lead to "risks of impaired credit discipline and weak risk-reward for banks" and reduced credit availability for borrowers.
Moreover, public banks face greater impact than private banks because of these loan waivers.
The Maharashtra government yesterday announced loan waiver for farmers and decided to form a committee to decide the criteria of debt relief.
The move by the Maharashtra government is expected to benefit 1.07 crore farmers in the state, who have land holdings of less than five acres.
The report noted however that "negative externalities of such actions need attention" as frequent farm waivers create expectations of future waivers and can be serious disincentive to delay or stop loan repayments.
Moreover, this might lead to reduction in credit availability and has risk of greater reliance on unorganised sources for incremental credit needs.
The report further noted that since loan waiver schemes generally cover crop loans and exclude other loans for investments or allied activities high indebtedness may not immediately benefit farmers due to other forms of debt which are not covered under the schemes.