Farm loan waivers can lead to a spike in delinquencies on tractor loans in several states as such write-offs disrupts credit discipline among farmers, warns a report.
A report by rating agency Fitch today said loan write offs work as an incentive to skip loan repayments.
"Delinquencies on tractor loans could rise in several states as a result of the political pressure for farmers to be granted waivers on agricultural loans," Fitch warned in a note while noting that tractor loans are not included in the UP scheme where the Yogi Adityanath government had decided to write off Rs 36,300 crore worth of farm loans with a cap of Rs 1 lakh per farmer.
"Though tractor loans were not included in the waiver scheme, farmers may expect this position to change in future announcements," the report warned.
The agency said there is a lack of clarity over whether tractor loans will be included in potential loan-waiver programmes in Maharashtra, Punjab, Haryana and Tamil Nadu. These states account for more than 30 per cent of the country's population.
"We would expect the delinquency rate on agricultural loans to take several months to return to normal following the announcement," the note said.
The crop season is currently in its harvesting period in most parts, a time when most farmers earn the bulk of their income. "If the farmers postpone loan repayments and use the money earned elsewhere, it could take at least until the next harvest to cure delinquencies which is six months away," the rating agency said.
It said government support may help cure delinquencies faster, but only if states compensate lenders quickly but this is unlikely given the usually slow workings of the state bureaucracies. Servicers' effective collection practises and customer-education programmes can, however, help to contain the potential rise in delinquencies, it said.
A report by American brokerage Bank of America Merill Lynch yesterday warned that farm loan waivers can shave off 2 per cent of the national GDP in the run-up to 2019 polls.
"Farm loan waivers of up to 2 per cent of GDP in the run-up to the 2019 hustings pose fiscal/rate risk and impacts credit culture," BofA-ML analysts said in a note, adding the UP waiver is worth 0.4 per cent of the state GDP.
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