Mumbai: Tractor loans could see a rise in delinquency rates as a result of political pressure for farmers to be granted waivers on agricultural loans, Fitch Ratings said in a report on Tuesday.
However, the negative impact of any potential rise in tractor loan delinquencies on Fitch-rated asset-backed security (ABS) transactions is likely to be minimal, given low exposure.
According to the rating agency, post Uttar Pradesh government announcing farm loan waivers where tractor loans were not included, farmers might expect a change in this position in future announcements. Also, there is a lack of clarity whether tractor loans will be included in potential loan waiver programmes in Maharashtra, Punjab and Haryana where 30% of the population resides.
“We would expect the delinquency rate on agricultural loans to take several months to return to normal following the announcement of policy details. The crop season is currently in its harvesting period in most parts of India, a time when most farmers earn the bulk of their income. If the farmers postpone loan repayments and use the money earned elsewhere, it could take at least until the next harvest in six months’ time to cure delinquencies,” the report noted.
Many senior Reserve Bank of India (RBI) officials in the past have stated their opposition to loan waivers as it hurts the credit culture and imposes immense pressure on the banking system.
State Bank of India (SBI) in March had announced one-time settlements for tractor and farm equipment loans that make up about Rs6,000 crore of doubtful and loss cases on its books. However, the bank specifically said that its scheme has nothing to do with any government announcement.
On 15 March, SBI chairman Arundhati Bhattacharya said support to farmers is necessary but not at the cost of credit discipline as people who benefit from loan waivers often expect further waivers in future, which leads to many more loans remaining unpaid.
The rating agency believes that government support might help cure delinquencies faster given that state governments compensate lenders quickly. However, this is unlikely since state bureaucracy works slowly. Effective collection practices and customer-education programmes can help in containing the potential rise in delinquencies.
“Indian ABS transactions are unlikely to be significantly affected, even if tractor loan delinquencies do rise. We do not expect any significant stress or rating impact and we have a stable rating outlook on these transactions,” the report added.