Moneycontrol BureauEven as hopes of a wider farm loan waiver have risen in the wake of PM Narendra Modi’s pro-agri speech on December 31, 2016, an Ambit report warns it could spell disaster for banks.
Banks under stress from mounting bad loans will only see a further deterioration in their profits. The non-performing assets of banks would increase and loan books will weaken, adds the report. “This exercise (the anticipated broader farm loan waiver) has the potential to derail other commercial activities of banks given the size and complexity of the farm loan waiver process.”
The report references two previous loan waiver schemes that proved to be disasters. The first one in 1990 ironically saw a decline in farm loans being disbursed owing to pre-existing dues. In 2009, even before the Budget announcement was made, agri repayments were falling for nine months.
In all, Rs 71,000 crore of farm loans were written off following the debacle.
Indian banks’ agri credit has risen three times since March 2008, says the report. With ripple effects of demonetisation still being felt, it is not difficult to imagine how much it could impact banks.
Ambit maintains a sell call on PSU banks as it sees the public sector lenders bearing the brunt of this anticipated loan waiver. Even private bank customers are likely to migrate to state banks to cash in on the loan waiver, says the report.
"Punjab National Bank, Union Bank and Bank of India are our high conviction SELLs."
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