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Indian farm loan waivers add to banking sector bad-debt woes

Experts expect agricultural write-offs to affect food supply, credit culture

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Farmers work in a paddy field in Kothari village, in the northeastern state of Assam, India.   © Reuters

MUMBAI -- Indian banks, already burdened with high corporate bad debt, face another threat to their balance sheets as state governments announce farm loan waivers to placate small and marginal farmers.

The western state of Maharashtra, which has some 3.5 million farmers, is the latest to announce waivers worth around 300 billion rupees ($4.65 billion). The local government capitulated after massive protests lasting weeks.

Maharashtra follows the northern state of Uttar Pradesh, which earlier in the year wrote off agriculture loans of nearly 364 billion rupees to some 21.5 million small and marginal farmers. Their counterparts in Madhya Pradesh, Punjab, and Tamil Nadu are now demanding similar concessions.

According to IndiaSpend, a data analysis website, meeting such demands would see a cumulative national loan waiver of 3.1 trillion rupees -- or 2.6% of gross domestic product last year. Nomura analysts reckon that over 65% of 9.5 trillion rupees of agricultural debt could be written-off.

Although such waivers could help 32.8 million indebted farmers in the short term, IndiaSpend said previous waivers had been Band-Aids that failed to address the deep malaise gripping India's agrarian economy.

According to Nomura, two-thirds of the loans in view are with state-owned banks, which are already badly affected by bad corporate debts.

Kotak Institutional Equities estimates that Maharashtra alone has nearly 4.2 trillion rupees of loans to the agricultural sector (23% of all loans), of which 1.2 trillion rupees are to farmers. Public-sector banks hold nearly 52% of total farm loans, followed by co-operative and private banks.

Agricultural loans are considered part of a "priority sector," as are loans for students, affordable housing, and small enterprises.

The central bank has voiced its concern about the situation. "Waivers undermine an honest credit culture," said Urjit Patel, governor of the Reserve Bank of India. "It leads to crowding-out of private borrowers as high government borrowing tends to [increase the] cost of borrowing for others." Patel said there needed to be consensus that waivers could eventually affect the national balance sheet.

India's nonperforming loans already amount to 7 trillion rupees. RBI's internal advisory committee on Tuesday named 12 corporate accounts for insolvency proceedings under the Insolvency and Bankruptcy Code adopted last year. These debtors combined owe some 1.75 trillion rupees.

Collateral impact

Apart from the impact on banks, the huge loan waivers could worsen the fiscal deficits of state governments and adversely affect capital expenditure. According to India Ratings, the Maharashtra farm loan waiver will push up the state's fiscal deficit to 2.71% of gross state domestic product in the financial year from April.

India Ratings said it remains to be seen if the entire loan waiver is absorbed in the present financial year or staggered over three to four years. It estimates the direct impact on Uttar Pradesh to be around nearly 364 billion rupees. This is about 2.6% of the gross state domestic product, and lower than the 3% limit prescribed by the 14th Finance Commission, an autonomous body that defines financial relations between the central and state governments.

Nomura said the waivers raise the question of whether current low food prices are sustainable. The consumer price index inflation fell to 2.2% year-on-year in May from 3.0% in April. "If they persist, this could result in lesser supply down the line, more debt, waiver or policy responses in the form of higher support prices," Nomura said.

No long-term solution

Economists are concerned about the negative effect debt waivers will have on the credit culture in agricultural communities across India.

"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," Kotak said. "Public banks face greater impact than private banks."

A report by the Times of India suggests expectations of loan waivers have already prompted some farmers to stop repayments.

"Farmers are emptying their bank accounts so that we cannot deduct the payment due from them," the head of a large bank told the newspaper.

The waivers will mask delinquencies for now, India Ratings said, but carry the risk of significantly impairing asset quality going forward. An unintended outcome could be reduced availability of credit to farmers, pushing them into the arms of unregulated money lenders.

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