By Gopika Gopakumar and Krupali Pandit Yadav, CNBC-TV18

The dilemma between commercial banking and toeing the line of their shareholder i.e the government, is not restricted to State Bank of India, or SBI. A bunch of PSU bankers say that they are facing rising defaults on farm loans, but they still plan to continue to lend to this sector.

The country's largest bank SBI has a 17% default rate in its tractor loan portfolio, but it is not alone. Several large PSU bankers say that they have seen a rise in defaults in the farm loan sector, ever since the government's waiver scheme got announced in the Budget this year. For instance-Union Bank said its farm bad loans have gone up by 1.8% in the last quarter. But will this mean that they will reduce credit to farmers? No, said PSU bankers.

“It is a general phenomenon that delinquencies in farm sector have been improving. But we are moderating by ensuring that a proper mechanism is in place as far as recoveries are concerned. As of now, our stance continues to be the same,” said MD Mallya, CMD, Bank of Baroda.

Credit to the farm sector has grown by 30% in 2007, and bankers said that despite the slight rise in bad loans, they will continue to grow this business because that is the mandate of their shareholder-the government. However, to manage the quality of the loans, they plan to select borrowers more carefully and strengthen the recovery mechanism. Bankers are also watching out for the loan waiver package which is expected to be implemented in the next two weeks. That package can help clean some of their accumulated bad loans.