 "Loan waiver: Naidu, KCR may do well to listen to SBI chief Bhattacharya's warnings")
The southern states ofAndhra Pradesh and Telangana are all set to implement the massive farm loan waivers their chief ministers promised in the run up to the state-elections.
According to an estimate by rating agency India Ratings and research (formerly known as Fitch India), the total agricultural loans given by banks in these two states will be around Rs 1,40,000 crore. This works out to about 19 percent of the total agriculture loans given by Indian banks as on March, 2014.
Andhra Pradesh Chief Minister, N Chandrababu Naidu, has promised to waive off loans upto Rs 1.5 lakh per family in Andhra Pardesh. Telangana too has promised asimilar scheme, promising to assist farmers hit by crop losses. The actual amount of loans being waived off couldn’t be ascertained by FirstBiz.
While both Naidu and his counterpart in Telangana, K Chandrasekhar Rao, can claim a political victory by fulfilling their electoral promises, the whole exercise could fatally impact the credit culture of the region, which is already in poor shapein the aftermath of the 2010 micro-finance crisis.
What is more worrying is that the waiver programme could potentially shut the doors of banks tomillions of farmers for several years because no lender will be willing to give money to the same farmer whose loan was once written off.
As Firstbiz has noted before, that’s precisely what loan waiver does to the borrower. It offers only temporary, near-term relief to the intended ‘beneficiary’ but makes him a permanent bad borrower to the lender in the long-term.
Also, the very announcement of the loan waiver compels even good borrowers, who have been repaying regularly since they too get compelled to stop paying back in the hope of total write off.
India Ratings, in a report on Monday, cautioned about the ramifications of the loan waiver and said such populist measures could set bad precedent in other states as well.
“These schemes seem to have yielded electoral gains, similar announcements could be made in other states as well. The most vulnerable would be states in which elections are nearing,” India Ratings warned.
The current proposal, which is a mix of full waivers and part credit in borrowers’ account, depending on the loan outstanding, may mask the delinquencies for the time being if carried out, it said.
“Nevertheless, it carries the risk of significantly impairing asset quality going forward. The unintended outcome of this could be reduced availability of credit to the farmers from banks, forcing them to resort to the unorganised lending sector,” India Ratings said.
Aftermath the UPA government-sponsored Rs 70,000 crore farm loan waiver in 2008-09, defaults among borrowers had risen substantially.
“Almost all the banks have witnessed significant increase in agricultural delinquencies post the waiver. While the delinquencies seemed to be stabilising over the last two years, if these schemes are carried through, it could undo the work done by banks in educating borrowers on the importance of credit discipline,” India Ratings warned.
Remember, agriculture is one of the biggest stress areas of Indian banks, especially state-run lenders, which are the major lenders to farmers. In the case of the latest round of farm debt waivers, the biggest impact will be felt bystate-run banks that are active in the southern region.
These include Andhra Bank, State Bank of India, Canara Bank and Syndicate Bank. The banking industry is already facing stress due to raising amount of bad loans. The total gross non-performing assets (NPAs) of banks currently stand around Rs 2.7 lakh crore, while loans restructured under various channels stands around Rs 6 lakh crore.
Over 90 percent of such stressed assets are on the book of state-run banks. Stressed assets impact the profitability of a bank since they have to set aside substantial amount of money to cover such loans.In November, RBI governor, Raghuram Rajan had warned about loan waivers, saying repeated loan waivers distort credit pricing.
Even bank chiefs have been wary ofthe sop. SBI chairman Arundhati Bhattacharya yesterday cautioned against the waivers. “It, sort of, breaks the credit discipline. Borrowers need to be able to repay the loan so that they can source the loan again to undertake the activity. If loans become NPAs, they will not be able to undertake that activity,” she has been quoted as saying in a report in The Financial Express.
And this is not the first time she has said this. Earlier in July, Bhattacharya had expressed fears that a spike in farm sector bad loans is possible more because of loan waiver than the deficiency in rains.
For obvious political gains, Naidu and Rao willbe indirectly harming millions of poor farmers by tagging them as bad borrowers before lenders beyond the immediate relief these farmers enjoy. In the process, the balance sheets of state-run banks would also take a hit on account of rise in bad loans.
These politicians should heed to the central bank and exercise financial prudence in the best interest of the farmer. Any relief to the poor farmer hit by crop losses should be given through direct government subsidies and not by misusing state-run banks.