Farm loan waiver may dent India credit growth, says Moody’s unit
Loan growth may fall to the lowest level since 1992 as lenders tighten underwriting standards for advances to farmers, with farm loan waivers raising the risk on billions of dollars of such debt
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Mumbai: Indian loan growth may fall to the lowest level since 1992 as lenders tighten underwriting standards for advances to farmers, after waivers by state governments raised the risk on billions of dollars of such debt, according to the local unit of Moody’s Investors Service.
Uttar Pradesh and Maharashtra, the country’s largest states by population, have announced waivers on more than Rs665 billion ($10.3 billion) in agricultural loans since April, raising the possibility of farmers holding back on payments in other poll-bound states. About three-fourth of the loans to Indian farmers are in places where such waiver programs have been announced or where public pressure increases the odds of one being announced, a Nomura Holdings Inc note on 13 June showed.
“This year possibly we have seen the highest levels of farm loan waivers so far in the country and more states are still considering it,” Karthik Srinivasan, group head of financial sector ratings at ICRA, said in a telephone interview. “Fear of credit culture issues may prompt banks to tighten their norms in terms of further incremental credit to the rural areas to conserve capital, a move that could slow down the loan growth further.”
The ability to repay borrowings by villagers, who make up about 70% of India’s population, has been crimped by depressed crop prices and rising costs. Debt waivers for stressed farmers are a often-used political tool that the central bank has warned hurts credit discipline and lowers the incentive for future borrowers to make repayments.
Loan growth in India is already close to the lowest level since 1992 after the government’s shock decision to withdraw Rs500 and Rs1,000 notes last year dented demand. A further slowdown in rural lending will hinder Prime Minister Narendra Modi’s efforts to bolster credit uptake and revive an economy expanding at the slowest pace since 2014.
With some state finances already under pressure, banks would be justified in fearing delays or even defaults on state-government payouts. Clarity is yet to emerge on when the state governments will compensate banks for the waivers announced given the stressed financials of some of them, Srinivasan said.
Agricultural credit accounts for as much as 14% of gross non-food bank credit outstanding, and rural banking branches account for about 40% of Indian bank branches, data compiled by RBI shows.
Nomura estimates that more than 85% of the Rs9.5 billion in agricultural debt is held by state-run and rural banks, making the debt forgiveness programs a negative for the sector.
“Cherry-picking to the extent possible in terms of borrowers would be what the banks would be doing in rural areas,” Srinivasan said. “It is going to be a waiting game for some time and given a choice they would move the money deployed to other sectors.” Bloomberg
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