Farm loan waivers squeeze future loan payments: SBI

21/06/2017

MUMBAI: State Bank of India has said that the past farm loan waiver had resulted in worsening of repayments on future loans. The country's largest bank also said in a research report that state finances are going to be adversely hit due to farm loan waivers, which come on the back of revenue losses due to prohibition in some states and financial pressure from restructuring of loans to state electricity boards under the Uday Scheme.
The report states that the total cost of farm loan waivers to states that have announced them adds up to Rs 1.31 lakh crore. Of this, the largest (Rs 36,359) is by Uttar Pradesh followed by Maharashtra (Rs 30,500). Andhra Pradesh, Telangana and Punjab are the remaining three states (see graphic).
The bank has said that loan waivers have a negative impact on repayment culture. "After the announcement of farm loan waiver in the 2008-09 Budget speech by UPA, agri NPAs dipped in FY09, before rising for majority of the states. In fact, the NPAs kept on increasing on an average for four years before witnessing a decline. For the central and southern states, the problem persisted for five years," said Soumya Kanti Ghosh, chief economist, SBI.
Apart from increasing probability of future defaults, farm loan waiver will lead to worsening state finances. "The impact on Punjab will be maximum, with state fiscal deficit jumping by an additional 4.8% of gross state domestic product (GSDP). We thus believe that states will make provisions of farm loan waiver in their budgets in multiple years as this will not impact fiscal deficit in one single year. Even in that case, we will see some worsening of fiscal deficit for some states," Ghosh said.
But what is positive about the recent round of farm loan waivers are the conditions attached. Most states require that loan should be waived only up to a specified threshold limit (mostly Rs 1 lakh), and any amount over that will have to be paid. Some southern states have come out with similar schemes in the past.
"To that extent, we can expect that there may not be a significant worsening of credit culture and hence we can get back quickly to trend growth for the agri sector," the report said.
Last week, a research report by Kotak had warned against copy cat waivers by state governments. "Obviously, the structure of the schemes will vary across states. We estimate that around Rs 1.6 lakh crore of farm loans (0.9% of GDP) could come up for waiver. Consequently, slippages to consolidated fiscal in FY2018 will be around 0.2-0.4% of GDP. Loan waivers could increase to Rs 2.2 lakh crore if other prominent agricultural states Bihar, Haryana and West Bengal also opt for it," the Kotak report said.

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