Banks—mainly public sector ones—are bracing for a fresh wave of bad loan shock if politicians cite Maharashtra as an example to waive off farm loans on a large scale in other states. Banks growing exposure to the agriculture sector, through the problematic lending model of Kisan Credit Cards (KCC), is making matters worse.
The size of the Maharashtra loan waiver, announced by the new coalition government, could work out to around Rs 51,000 crore. The government has promised to waive off loans upto Rs 2 lakhs. Going by the rule book, banks will have to classify these loans as non-performing assets as they will not be getting their money back on schedule.
Agriculture NPAs alone amount to Rs 1.1 lakh crore at present. Accounting for the Rs 3.14 lakh crores of loans waived off over the last decade, the total NPA burden for banks could be as much as staggering Rs 4.2 lakh crores, according to a research by SBI economists. Now, add the potential Maharashtra loan waiver amount, and the figure could well be around Rs 4.7 lakh crores.
Further pain for PSBs?
Ironically, banks are set to suffer a double whammy because these entities are already struggling for capital to lend after the massive bank NPA clean up exercise. Further bad loan shocks from loan waivers complicates matters for the banks. That’s because a fiscally constrained central government may not in a position to fund public sector banks next fiscal. This fiscal so far, the government has already front-loaded much of the Rs70,000 crore capital infusion it has promised to banks. But there is no clarity if PSBs can expect such generosity next year.
Credit culture gone for a toss
Loan waivers don’t just impact the finances of state-run banks; they have a prolonged effect on the credit culture of borrowers. This was evident during the 2010 microfinance crisis when politicians exhorted people not to repay loans. Once a loan waiver is promised, even honest borrowers typically stop repayments of loans adding to the woes of banks. Farm loan waiver is always an easy tool for the vote hungry politician; a promise by the politician to the farmer that their loans will be written off in exchange of votes.
Now, who wouldn’t like to have a share of freebies? The winning politician then uses taxpayers’ money to repay these loans to banks, thus straining fiscal positions of state governments. But banks do not get money on time from governments, and this forces them to go slow on further lending to farmers.
The KCC problem
Even more worrying is the rising exposure of banks to Kisan Credit Cards (KCC) loans. Farmers are supposed to use this money for productive purposes such as buying of farm equipment or fertilizer. But, in many cases, they use it for unproductive consumption purposes. The big problem with KCC is that the limit upto which the farmer can draw money is flexible. Farmers often make very less repayment, just enough to keep the account standard.
This loan, in effect, keeps getting rolled over or evergreened for years. At the end of March, 2019, the KCC loans aggregated to about Rs 6.68 lakh crore, constituting about 60 percent of the total agricultural loans given by them, the SBI report highlights. KCC payments also suffer on account of crop losses, faulty pricing system of produce leading to heavy losses for the farmer and natural calamities. The KCC Model, as the SBI report warns, needs to be re-examined closely.
This is the second time Maharashtra is rolling out a farm loan waiver in the last two years. Many other states have already implemented similar waivers. Promising loan waivers is any day the easier option for politicians than to come up with long term solutions to fix the problems in the agriculture sector. If the trend spreads across the country, the real casualty would be the farmer himself because future bank loans will be harder to come by. But before that, public sector banks will be the first in the line of fire.Get access to India’s fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code “GETPRO”. Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.
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