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At a time when the Indian banking sector is struggling with bad loans because of the inability of over-extended companies to repay them, it seems that the agricultural sector will add to its woes. Earlier this week, private sector lender HDFC Bank Ltd reported that during the June quarter, 60% of the total increase in its gross non-performing assets was related to the agriculture sector. Axis Bank has also flagged the issue.

Recovery is being affected by farm loan waivers announced by several states. To be sure, farmers are behaving rationally as they stand to gain by defaulting at this stage.

This behaviour is likely to get more ingrained in the system, with periodic farm loan waivers affecting credit culture. It could also end up affecting the flow of credit to the sector, which could impact private investment in the medium term.

There is no doubt that the sector has genuine problems, but the question that needs to be asked is this: will farm loan waivers solve them, or will they only end up creating more problems?

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