Why farm loan waivers hit PSU banks
- Donald Trump pressures US senators to back Republican healthcare bill
- India to send 700 tonnes of relief material for Rohingya refugees in Bangladesh
- Sushma Swaraj slams Pakistan at UNGA, asks its leaders to introspect
- Mexico jittery after new earthquake of 6.1 magnitude
- Sushma Swaraj calls for early start of negotiations for UNSC reforms
Mumbai: Farm loan waivers impact public sector banks the most due to their high exposure to agriculture and farmer loans. Though the government reimburses farm loan waiver, such schemes create second order impact in terms of impaired credit discipline and low loan availability.
“Frequent occurrence of such populist actions leads to risks of impaired credit discipline and weak risk-reward for banks and reduced credit availability for borrowers,” Kotak Institutional Equities said in a report on 12 June.
The research firm also said that frequent farm waivers create expectations of future waivers and can be a serious disincentive in loan repayments.
Greater share of PSU banks in farm credit, which are considered quasi-government, increases the risk of moral hazard.
The Maharashtra government on Sunday waived off farm loans of marginal farmers—3.1 million out of the total 13.6 million registered farmers—according to a Mint report.
Maharashtra has nearly Rs4.2 trillion agriculture loans (23% of loans) and Rs1.2 trillion farm loans (7% of loans) with PSU banks holding nearly 52% of total farm loans, followed by co-operative banks (32%) and private banks (12%).
According to Kotak Institutional Equities, Bank of Maharashtra, which has 60-65% of loans in the state, has a nearly 12% gross non-performing loans (NPL) ratio in the agriculture portfolio.
Also Read: GST: India’s Great Migration challenge
PSU banks, including State Bank of India, Punjab National Bank, Bank of Baroda, Bank of Maharashtra, Bank of India, Canara Bank, Central Bank of India, Union Bank and IDBI Bank, have exposure of Rs2,26,600 crore to agriculture loan and Rs61,400 crore to farm loans while private banks’ (ICICI, HDFC Bank and Axis Bank) exposure to agriculture loan stands at Rs53,900 crore and farm loan at Rs13,800 crore at the end of March 2017.
However, Kotak Institutional Equities said that high indebtedness may not immediately benefit farmers due to other forms of debt, which are not covered under waiver schemes. Typically, loan waiver schemes cover crop loans and exclude other loans for investments or allied activities, where repayments still come from farming.