Loan waiver vow causes 24% rise in Madhya Pradesh farmers’ bad debts

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 nonbanking sources for loans.



Latest available data shows that farm-related nonperforming 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.
Banks wary of lending as states take time to

clear loan

amt waived

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 has joined Madhya Pradesh, Chattisgarh and Assam in announcing farm

loan waiver

schemes. The executive said that 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 ₹6,041 crore scheme in 2016 will clear dues of ₹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 ₹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 dis-incentivise 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.