CHENNAI/NEW DELHI: Farm loan waivers are bad news for banks- and for farmers. Anticipating relief, farmers start skipping repayments, impacting bank finances. Banks, in turn, go slow on fresh loans until state governments reimburse the amount written off, which often happens over several years.
This slows down credit supply to farmers, pushing some of them to non-banking sources of loans.
Latest available data shows that farm related non-performing assets in
Madhya Pradesh
doubled to 10.6% of advances in a little over three years between 2014-15 and June 2018. In just a one-year period ending June, NPAs on
farm loans
in the state rose 24%, according to the state-level bankers' committee.
"It is natural for borrowers to stop paying once they anticipate relief. We are seeing a similar trend in
Rajasthan too," said a senior banker posted in the state, which recently joined Madhya Pradesh, Chattisgarh and Assam in announcing
farm loan waiver
schemes.
NPAs in the farm loan segment were estimated at around 5.1% at the end of March 2018. But loan defaults is only one part of the problem. Banks too become wary of lending as states often take time clearing the loan amount that is waived. For instance, Tamil Nadu, which announced a Rs 6,041 crore scheme in 2016 will clear dues of Rs 3,169 crore to cooperative institutions over five years. Short of funds, banks often prefer to go slow on fresh lending.
In Karnataka, for instance, during a recent state-level bankers’ meeting, it was observed that there was a Rs 5,353 crore fall in the outstanding agricultural loans between March and June, 2018.
“It ends up breaking the credit cycle as banks want their dues cleared,” said a banker. The senior banker in Rajasthan said that there was no clarity on when the state government would clear the dues related to the waiver.
“While waivers may cleanse banks’ balance sheets in the short term, it may disincentivise banks from lending to agriculture in the long term... they impact credit discipline, vitiate credit culture and dis-incentivise borrowers to repay loans, thus endangering moral hazard,” RBI said in its report on state finances, released last July.
Most economists have warned against loan waivers with
former RBI governor Raghuram Rajan saying that he had written to the Election Commission seeking a ban on such pre-poll announcements.
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