Delinquency in agriculture loans is already on the rise, even as banks brace for big write-offs following the string of farm loan waivers recently announced by several state governments. In the six months to 30 September, Indian banks saw bad loans rise to 8.4% of their agriculture book, a rise from 7% as of March 2018, according to data from Reserve Bank of India (RBI). The bad loan ratio has climbed every year since 2011-12, as shown in the adjoining chart.

This corresponds to the growing farm distress, and as this Mint column noted on 21 May, farm wage growth is at a three-year low. Add the collapse in food prices over the past year, and the distress in farm households is palpable. Stagnating wages and a collapse in realizations from selling produce is enough to throw incomes of farmers and loan payment schedules into disarray. Notwithstanding the minimum support price hike, anecdotal evidence suggests farmers’ revenue is falling.

Hence, the rising delinquency rates should not be surprising. But what should be noticed closely is that these rates haven’t climbed sharply merely in the last one year when the distress in agriculture seems to have grown deeper. The trend of rising bad loans is around for more than five years now. Another factor is that this rise comes even as the share of farm loans in the total credit disbursed by banks has remained stagnant over many years. On an incremental basis, banks disbursed just 6.37% of the total credit they gave in FY18 to agriculture, the lowest in a decade.

This shows that lenders are not only wary of giving out farm loans, but are also unable to keep a lid on delinquencies. Much of this hesitation to lend and the inability to recover could be attributed to concerns stemming from potential waivers by governments. Analysts and policymakers have warned of the negative effects of farm loan waivers. The central bank too has warned at regular intervals that waivers vitiate credit culture. After all, if farmers expect a waiver to be announced every few years, why would they bother paying back their loans?

Provisioning against bad loans is not new especially in the wake of chunky toxic assets in corporate loans. But loan waivers could mean further write-offs, which not only shrinks the loan book but also closes all potential future interest recovery routes.

In the run-up to national elections, eight states have already announced farm loan waivers of various amounts which add up to a massive 1.9 trillion, according to a Mint report on 21 December. Such waivers will only make bankers more reluctant to lend to farmers than before.

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