Banks: Maharashtra announces farm loan waiver - Kotak

Maharashtra announces farm loan waiver. After UP and Punjab, Maharashtra becomes the latest state to announce farm loan waiver. While exact criteria for availing waiver are being worked out, marginal and small farmer loans are being waived off with immediate effect, per news reports. As we have highlighted in earlier notes, frequent occurrence of such populist actions leads to risks of impaired credit discipline and weak risk-reward for banks and reduced credit availability for borrowers. Public banks face greater impact than private banks.

Maharashtra announces farm loan waiver; modalities awaited

According to news reports, the Maharashtra state government has announced a farm loan waiver scheme, with complete modalities such as criteria for debt relief to be worked out by a committee comprising the state government and farmers. Loans of small and marginal farmers have been waived off with immediate effect with these farmers being eligible for fresh loans despite being blacklisted earlier due to overdue status of their loans. Additionally, the government had also reportedly agreed to waive off penalty and interest on power dues

Maharashtra: Rs1.2 tn farm loans; PSU and co-operative banks more vulnerable

Maharashtra has nearly Rs4.2 tn agriculture loans (23% of loans) and Rs1.2 tn farm loans (7% of loans) with PSU banks holding nearly 52% of total farm loans, followed by co-operative banks (32%) and private banks (12%). We are limited by the unavailability of bank-wise farm loan exposure data in the state. Bank of Maharashtra, which has ~60-65% of loans in the state, has nearly 12% gross NPL ratio in the agriculture portfolio. If we were to consider just the farm loans, the GNPL ratio is likely to be much higher for this portfolio.

Madhya Pradesh: Rs0.7 tn of farm loans; ~25% of state loans are farm loans

We also look at MP as another state with risk of farm loan waivers given the recent farmer protests and same political party leading Maharashtra, MP and UP. While the quantum of loans in MP is lower than Maharashtra, a greater quantum of state loans falls under risk as agriculture loans are a major contributor to state loans. Select major banks such as Bank of India, Central Bank and Union Bank have ~20-40% of state loans toward crop loans. Notably, the agriculture gross NPL in the state is not alarmingly high at ~10%.

Negative externalities of such actions need attention

- Impairment of credit discipline. Frequent farm waivers create expectations of future waivers and can be serious disincentive to delay or stop loan repayments. NSSO study suggests that ~60% of farm credit is originated by institutional sources. Greater share of PSU banks in farm credit, which are considered quasi-government, increases the risk of moral hazard.

- Lower credit availability. Lower product profitability due to higher delinquencies can lead to higher interest rates or reduction in credit availability. This has obvious risk of greater reliance on unorganized sources for incremental credit needs.

- Second-order impact. We note that loan waiver schemes generally cover crop loans and exclude other loans for investments or allied activities, where repayments still come from farming. High indebtedness may not immediately benefit farmers due to other forms of debt, which are not covered under waiver schemes.

Source : Equity Bulls

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