Farm loan waivers are already taking a toll on banks' balance sheets

At its annual general meeting, HDFC Bank’s CEO and Managing Director Aditya Puri said agriculture is the one segment showing most stress because of demonetisation and farm loan waivers.

"At this point of time there is distress which has to be alleviated. Is there going to be some temporary impact on NPAs? Yes, I think the stressed assets will go up but will there be a major impact? No!," he said.

Similarly, Axis Bank saw deterioration in loans outside its so-called watch list and half of its retail slippages of around Rs 1,000 crore are related to agriculture.

Though ICICI Bank has not seen much impact from farm loan waivers, the top three private lenders’ (ICICI Bank, HDFC Bank and Axis Bank) exposure to rural loans stood at Rs 36,630 crore (down from Rs 53,900 crore in March quarter), Rs 28,000 crore and Rs 26,880 crore as of June-end.

Rakesh Jha, Executive Director and Chief Financial Officer of ICICI Bank, said in a conference call with analysts that though there no increase in NPAs in the rural portfolio, caution is being exercised: “But of course it is a portfolio that we are closely monitoring over the next couple of quarters. We have seen some increase in the  overdues,” he said.

Bandhan Bank said two-thirds of its NPAs of Rs 175 crore originated in Madhya Pradesh, Maharashtra and Uttar Pradesh.

All scheduled commercial banks have to make 40 percent lending exposure towards priority sector lending with 18 percent towards direct agriculture.

Farm loan waivers impact public sector banks the most because of their high exposure to agriculture and farmer loans as directed by the government. Though the government reimburses farm loan waivers, such schemes create second order impact in terms of impaired credit discipline and low loan availability.

Top public sector banks, including State Bank of India, Punjab National Bank, Bank of Baroda, Bank of Maharashtra, Bank of India, Canara Bank, Central Bank of India, Union Bank and IDBI Bank (most yet to declare results) have exposure of Rs 226,600 crore to agriculture loans and Rs 61,400 crore to farm loans.

For smaller south-based Andhra Bank, which reported its results last week, of its Rs 3,500 crore slippages during the quarter, Rs 426 crore came from agriculture. Punjab National Bank also saw spike in NPAs and expects it to rise further.

Dena Bank, among other banks, said it has seen lower repayments towards farm loans in the first quarter and hence could see further slippages into bad loans.

“Frequent occurrence of such populist actions leads to risks of impaired credit discipline and weak risk-reward for banks and reduced credit availability for borrowers,” Kotak Institutional Equities said in a report on June 12.

Banks are likely to witness increase in NPAs in the agriculture sector and a general worsening of credit culture, HDFC Bank’s economists said in a note.

Several banks have become cautious on further lending to the sector given the rise in non-repayments.

"Loan waivers are likely to also impact the supply of credit as fresh lending to the agriculture sector could dry up...With some farmers receiving loan waivers, other farmers across states, even those who are able to pay, are wilfully defaulting on loans in order to get loan waivers. Thus resulting in a classic microeconomic problem called the moral hazard," the note said.

Meanwhile, Haryana, Madhya Pradesh, Gujarat and Rajasthan could also implement loan waivers, with farmers in those states demanding relief.