Mumbai: The government’s decision to reimburse banks for their losses from the Rs71,680 crore farm loan waiver scheme may not be as good for them as expected as it will not cover debts already written off.
Worry factor: A file photograph of a farmer. Loans taken before 1997 and which have turned bad will not be covered by the waiver scheme.
According to people in the banking industry who did not want to be named, loans taken before 1997 and turned bad will not be covered by the waiver scheme. Besides, loans already written off by banks will not be reimbursed.
This is bad news for banks as recovery or reimbursement of written-off loans add to their profitability. “The written-off accounts are very sticky and there is a very slim chance of recovering those (accounts). These bad debts are caused by the crop failures or monsoon problems and banks don’t expect to recover them,” said Abhijit Majumder, an analyst with domestic brokerage firm Prabhudas Lilladher Ltd.
Hatim Brochwala, an analyst with Mumbai-based brokerage Khandwala Securities Ltd, said the decision (of not covering the written-off assets) would not affect banks’ stocks much as the market has already factored this in. “It is a bad news for banks no doubt but I think the market already sensed it. Otherwise, the bank stocks would not have fallen so much,” Brochwala said.
Bankex, the banking index of the Bombay Stock Exchange, fell 7.93% last week while the benchmark Sensex lost 4.5%. Public sector banks fell the most last week with Punjab National Bank losing 9.85% and State Bank of India (SBI), 7.67%. On Friday, SBI’s stock closed at Rs1,573.25, lower than the price at which it had recently sold its shares.
“The government will not provide for the written-off farm loans but only take care of the overdue loans,” a general manager of a public sector bank said. Overdue loans are those where payment is due but the borrower is in no position to pay. After some time, an overdue loan becomes a non-performing asset.
The government on Friday raised the waiver programme to Rs71,680 crore and widened the scope for eligibility.
In his Budget speech, finance minister P. Chidambaram had proposed to waive Rs60,000 crore of loans. The package, which covers loans overdue on 31 December and remaining unpaid until 29 February, is to be implemented by 30 June. The scheme now covers Kisan credit card holders and farmers borrowing under self-help and joint liability groups. Kisan credit cards are issued to farmers to buy inputs, and to draw cash for their production needs.
Some 43 million farmers are now eligible for debt waiver against 40 million estimated earlier. The number of farmers holding more than 2ha of land, who are eligible for a one-time waiver of Rs20,000 or 25% of their outstanding loans, has come down to about six million from 10 million.