Agri debt waivers destroy credit culture: India Ratings
The debt waiver promises by the incumbent governments of Andhra Pradesh and the newly formed state of Telangana can significantly impact the credit culture among the agriculture communities in these two states., says India Ratings.
India Ratings & Research (Ind-Ra) says the debt waiver promises by the incumbent governments of Andhra Pradesh and the newly formed state of Telangana can significantly impact the credit culture among the agriculture communities in these two states. More importantly, as these schemes seem to have yielded electoral gains, similar announcements could be made in other states as well. The most vulnerable would be states in which elections are nearing.
Ind-Ra estimates the total agricultural loans in these two states at around INR1.4trn (about 19% of the country’s total agricultural loans outstanding at FYE14). The current proposal, which is a mix of full waivers and part credit in borrowers’ account depending on the loan outstanding, if carried through, may mask the delinquencies for the time being. Nevertheless, it carries the risk of significantly impairing asset quality going forward. The unintended outcome of this could be reduced availability of credit to the farmers from banks, forcing them to resort to the unorganised lending sector.
Ind-Ra’s research shows that the delinquencies in the period post the debt waiver in 2008-2009 increased significantly though the agricultural credit growth was reasonable. Almost all the banks have witnessed significant increase in agricultural delinquencies post the waiver. While the delinquencies seemed to be stabilising over the last two years, if these schemes are carried through, it could undo the work done by banks in educating borrowers on the importance of credit discipline.
Ind-Ra’s research shows that the maximum impact of a loan waiver is on regional public sector banks. The gross NPLs of public sector banks constitute about 7.3% of their aggregate equity. However for a few banks, this proportion is over 15%.
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