Despite criticism on farm loan waivers, a data study shows that the increase in non-performing assets (NPAs) is contributed more by the industry than the agriculture sector.
According to a study report by Anand Rathi, in terms of contribution to overall bank NPA, industry accounts for two-thirds and services nearly 20 percent. “The contribution of agriculture and retail lending account for nearly 10 percent and 5 percent, respectively, of overall NPA,” the report said.
Traditionally, NPA levels of the priority-sector lending (of which agro loans are major components) face a higher NPA-to-loan ratio than the non-priority sector. In recent years, the situation has reversed, said Sujan Hajra Chief, Economist of Anand Rathi in the report.
As per data from 2011 to 2016, the agriculture loan NPAs stood between 4-6 percent while the industry NPAs have consistently increased sharply from nearly 3 percent to 12 percent in 2016.
Today, banks are struggling with a total bad loans worth Rs 7.7 lakh crore, largely arising from large corporate defaults. On the other hand, the total agriculture loans across states in India stood at Rs 9.54 lakh crore as against the total bank credit of about Rs 76 lakh crore.
After the 2008 agriculture loan waiver of Rs 60,000 crore given by the then UPA government, the share of gross NPA in overall loans was lower than the ratio in 2007 at 2.5 percent. The asset quality deterioration started three years after this loan waiver was given.
However, this is largely the result of banks getting the repayment of loans from the government.
The report highlights that even in incremental terms, the gross-NPA-to-loan ratio was modest (between 1.2 percent and 3 percent) during 2008-11.
Additionally, farmers also have a disincentive for defaulting on loans as every default leads to a sharp increase in interest costs and a loss in collateral which deters them from getting future loans.
The report also suggests that the total impact of loan waivers on state finances is overestimated and that it is unlikely to be more than Rs 20,000 crore or 0.13 percent of GDP in the current year.
Citing the economics of farm loan waivers, experts see this move jeopardizing the states’ financial health and eventually the credit culture that could further restrict further lending to farmers.
On Monday, Punjab became the third state this year to announce farm loan waivers after Uttar Pradesh and Maharashtra, making the agriculture loan waivers at about Rs 90,000 crore for the three states.
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