HDFC Bank Ltd, otherwise immune to the bad loan problem plaguing its peers, saw its gross non-performing assets (NPAs) ratio rise to the highest in seven years thanks to the farm loan waivers announced by a handful of states.

India’s most valuable lender’s gross NPA ratio climbed to 1.24% for the June quarter from 1.05% in the previous quarter and 1.04% in the corresponding quarter a year ago. On an absolute basis, bad loans stood at Rs7,242 crore, a 23% rise in just one quarter. More than half of the increase in bad loans was from its agriculture portfolio, the bank said, adding that announcement of farm loan waivers impacted recoveries in this segment.

HDFC Bank’s management didn’t forcefully dispel concerns over agriculture loans in the coming quarters. Deputy managing director Paresh Sukthankar indicated that the portfolio will have to be monitored as loan waivers are being finalized in many states. It is obvious that the lender is seeing more stress emanating from this corner of its loan book.

However, Sukthankar assured that the stress is limited to only the farm portfolio and its exposure to the microfinance segment has shown no signs of weakening further. Recall that in the previous quarter, many banks including HDFC Bank had indicated stress on this portfolio arising out of demonetization.

The fact that HDFC Bank saw a deterioration in its agriculture loans is proof enough that farm loan waivers will worsen the already colossal bad loan problem for banks. This is a distressing sign for public sector banks, many of which would be detailing their quarterly results soon.

For HDFC Bank, the rest of its metrics continued to be promising.

Despite provisions rising sharply owing to the farm loan stress, the bank reported a 20.7% rise in its profit after tax, which is higher than the growth it reported in the previous quarter.

The lender’s loan growth remained unscathed and even improved to an enviable 23.4%, led by both corporate and retail loan growth. As a result, its core income grew at a healthy pace of 20%.

Since HDFC Bank met all expectations on profit metrics, it is no surprise that the stock ended nearly 2% up on the bourses. The rise in bad loans is seen as a blip in an otherwise impeccable loan book.