After UP waiver, farmers in other states stop paying off loans
Bankers' worst fears about the impact of the Uttar Pradesh government's decision to grant farm loan waivers are already coming true. After UP waiver, farmers in other states stop paying off loans" Bankers' worst the impact of the Uttar Pradesh government's decision to grant farm loan waivers are already coming true, as a few farmers in other states have already halted paying installments on existing farm loans. On Tuesday, UP Chief Minister Yogi Adityanath fulfilled the Bharatiya Janata Party's election promise by waiving farm loans totalling Rs 36,359 crore. The decision is expected to benefit at least 2.15 crore small and marginal farmers in the state. On the face of it, the decision may not directly impact the banks’ balance sheets as the state government will compensate the banks on the defaulted payments. However, public sector banks are not too happy given that it has already started impacting the credit discipline of borrowers. A senior executive of a large public sector bank.
“Since the time it has been talked about in the poll campaigns and other states also demanding it, a lot of our loans aren’t being serviced in states including Tamil Nadu and Maharashtra. Though bankers stand to gain on the non-repayments, it badly impacts our recovery from the borrowers.” Another bank official pointed out, “Farmers in other states are already asking if they need not repay the loans. This will add NPAs (non-performing assets) in the books of the other state loans where we will not be compensated." The official said it caused a dilemma over whether to continue lending in the knowledge that the loan would not be repaid. "For UP, we need to see the fine print of the waiver scheme to see how it will work out and how much do we stand to gain,” the banker added.
Anticipating such a fallout, bankers had strongly opposed such a sop, stating that a waiver is not the right method to support farmers as it affects the loan repayment behaviour of most borrowers. According to State Bank of India (SBI) Chairman Arundhati Bhattacharya, “Credit discipline breaks when you waive off farm loans. Money will come in today because the government will pay, but when we will give loans in future, farmers will wait for next elections. Support to the farmers is necessary but not at the cost of credit discipline.” Incidentally, in February, SBI came out with a scheme to allow one-time settlement for its tractor and farm equipment loans that make up about Rs 6,000 crore of doubtful and losses on its books, willing to take 40 percent cut on their loans.
Even before the UP decision was finalised, there was pressure building on other state governments to follow suit. In Maharashtra, Chief Minister Devendra Fadnavis, head of the BJP-led government, said they would study the UP farm loan waiver model as its ally Shiv Sena and the Opposition are demanding a similar scheme. On Tuesday, the Madras High Court also directed the state government to expand its farm loan waiver scheme to include farmers who own more than five acres. The UP waiver amount works out to 3.9 percent of the banking system’s exposure to agriculture and allied activities, and 0.5 percent of gross bank credit. As per data, the total outstanding credit by all commercial banks in 2016 towards the agriculture sector is Rs 86,240 crore in Uttar Pradesh. According to Reserve Bank of India data (2012), 31 percent of the direct agriculture finance went to marginal and small farmers (landholdings up to 2.5 acres). Previously, former Reserve Bank of India governor Raghuram Rajan had also pointed out that the “repeated loan waivers by various state governments distort credit pricing, thereby also disrupting the credit market”
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Bankers' worst fears about the impact of the Uttar Pradesh government's decision to grant farm loan waivers are already coming true. After UP waiver, farmers in other states stop paying off loans" Bankers' worst the impact of the Uttar Pradesh government's decision to grant farm loan waivers are already coming true, as a few farmers in other states have already halted paying installments on existing farm loans. On Tuesday, UP Chief Minister Yogi Adityanath fulfilled the Bharatiya Janata Party's election promise by waiving farm loans totalling Rs 36,359 crore. The decision is expected to benefit at least 2.15 crore small and marginal farmers in the state. On the face of it, the decision may not directly impact the banks’ balance sheets as the state government will compensate the banks on the defaulted payments. However, public sector banks are not too happy given that it has already started impacting the credit discipline of borrowers. A senior executive of a large public sector bank.
“Since the time it has been talked about in the poll campaigns and other states also demanding it, a lot of our loans aren’t being serviced in states including Tamil Nadu and Maharashtra. Though bankers stand to gain on the non-repayments, it badly impacts our recovery from the borrowers.” Another bank official pointed out, “Farmers in other states are already asking if they need not repay the loans. This will add NPAs (non-performing assets) in the books of the other state loans where we will not be compensated." The official said it caused a dilemma over whether to continue lending in the knowledge that the loan would not be repaid. "For UP, we need to see the fine print of the waiver scheme to see how it will work out and how much do we stand to gain,” the banker added.
Anticipating such a fallout, bankers had strongly opposed such a sop, stating that a waiver is not the right method to support farmers as it affects the loan repayment behaviour of most borrowers. According to State Bank of India (SBI) Chairman Arundhati Bhattacharya, “Credit discipline breaks when you waive off farm loans. Money will come in today because the government will pay, but when we will give loans in future, farmers will wait for next elections. Support to the farmers is necessary but not at the cost of credit discipline.” Incidentally, in February, SBI came out with a scheme to allow one-time settlement for its tractor and farm equipment loans that make up about Rs 6,000 crore of doubtful and losses on its books, willing to take 40 percent cut on their loans.
Even before the UP decision was finalised, there was pressure building on other state governments to follow suit. In Maharashtra, Chief Minister Devendra Fadnavis, head of the BJP-led government, said they would study the UP farm loan waiver model as its ally Shiv Sena and the Opposition are demanding a similar scheme. On Tuesday, the Madras High Court also directed the state government to expand its farm loan waiver scheme to include farmers who own more than five acres. The UP waiver amount works out to 3.9 percent of the banking system’s exposure to agriculture and allied activities, and 0.5 percent of gross bank credit. As per data, the total outstanding credit by all commercial banks in 2016 towards the agriculture sector is Rs 86,240 crore in Uttar Pradesh. According to Reserve Bank of India data (2012), 31 percent of the direct agriculture finance went to marginal and small farmers (landholdings up to 2.5 acres). Previously, former Reserve Bank of India governor Raghuram Rajan had also pointed out that the “repeated loan waivers by various state governments distort credit pricing, thereby also disrupting the credit market”
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