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Banks say farm loan waivers to reduce lending capacity as they stare at jump in NPAs

Banks are staring at a jump in non-performing assets (NPAs) as more and more states are opting for farm loan waivers, reportsThe Economic Times.

After loan waivers are announced, farmers stop loan repayments. In addition, state governments stagger payments over four to five years. This is when there is a sharp rise in NPAs.

Banks receive money from the government only after a considerable gap as and when the scheme details are framed and processes worked out. This, in turn, puts pressure on banks’ books, resulting in lending squeeze. In addition, defaulters will become ineligible to get fresh loans.

With banks providing for these NPAs, their lending capacity reduces. Also, there are chances of other states also waiving off such loans, which will only lead to rise in loan defaults.

“This has a spiral impact on credit repayment culture… Repayments will halt these states with rise in defaults,” a banking official told the paper.

Also, farmers approach informal sector lenders due to reduction in bank credit following waivers, which only increases indebtedness as such loans are expensive.  

States like Maharashtra, Uttar Pradesh and Punjab had announced waivers in 2017. Karnataka announced the same earlier this year. Together, these states have waived farm loans to the tune of Rs 80,000 crore.

The fresh farm loan waivers have come from Madhya Pradesh, Rajasthan and Chhattisgarh, where as much as Rs 1.47 lakh crore of farm loans are outstanding. And now the waivers could add up to Rs 1.5 lakh crore.

“If banks don’t get repayment of loans, where will funds to lend for the next cycle come from?” asked the official, pointing out that states going in for the loan waivers do not make an upfront payment of the total loans due.

Reports suggest that the loan waiver is likely to cost Rs 18,000 crore to the Rajasthan government and about Rs 35,000 crore to the Madhya Pradesh government.On the national front, there were two farm loan waivers in 1990 and 2008. State-wise, Telangana and Andhra Pradesh had announced waivers in 2014, followed by Tamil Nadu in 2016.