Context: Loan waving to small and marginal farmers in India.
In wake of fulfilling poll promises and increasing farmer protests and suicides in India, many state (federal) governments have decided to waive loans to small and medium scale farmers.
However, I found on going through various newspaper sources that loan waiving is not a good idea from the economic point of view. Why does then loan waiving lead to a decrease of the NPAs (Non performing assets)?
"Loan waiving" means "loan write-off": the debt is eliminated. Therefore it is subtracted from the assets of the lender, and if it was already a non-performing loan (asset for the lender), the total of non-performing assets is now reduced.
The value of the debt that has been wrtten-off appears as a once-off "loss" in the Profit & Loss statement of the lender.
Whether debt write-off is or is not "a good idea" has no single/simple answer, and it depends on a lot of factors that may change in time and country.
The main abstarct arguments against is that
a) writing-off debt signals to other borrowers that they can too leave their debts unserviced on purpose, even though they are financially able to service them, in expectation of a future new write-off: in other words, it creates what is called "moral hazard",
b) seeing debts being written off, lenders will be less willing to lend funds in the future, even to prospective borrowers in good financial standing.
c) finally a pure economics agument, says that businesses that cannot repay their loans are inefficient businesses and so it is not in the economy's best interest to "provide a lease of life" through debt write-off to such inefficient entities.
Again, the above are the abstarct arguments. The OP has a specific situation in mind, and a specific study should be carried out to evaluate and quantify the socio-economic pros and cons of debt write-off for the specific case.
