Karnataka May Add To Rs 88,000 Crore In State Farm Loan Waivers Already Announced

Be it Punjab, Uttar Pradesh or Karnataka, when elections are around the corner, the promise of farm loan waivers seems not far behind. Karnataka, which goes to the polls in five days, has seen two major political parties promise a waiver of agricultural loans, should they be voted into power.

The Bharatiya Janata Party in its manifesto has promised a loan waiver for all crop loans up to Rs 1 lakh from public sector banks and cooperative banks. The JD(S) has matched that promise. This atop an existing farm loan waiver announced by the ruling government. In June 2017, the Congress led government had announced a plan to waive farm loans of up to Rs 50,000 taken from cooperative banks.

Should a wider loan waiver be announced once a new government is in place, Karnataka would join a growing list of states which have opted for a policy that many have cautioned against.

The Centre has stayed away from a nationwide waiver like the one announced by the United Progressive Alliance in 2008, as part of which Rs 60,000 crore in farm loans were waived. But the amount of loans waived by individual states has already overtaken that amount. Over the past twelve months or so, six states have announced loan waivers. This includes Maharashtra, Uttar Pradesh, Punjab, Tamil Nadu, Andhra Pradesh and Telangana. Total loans waived stand at over Rs 88,000 crore.

Karnataka Adds To The Pain

According to a report by Kotak Institutional Equities, Karnataka accounts for 8 percent of all agricultural loans in India.

Nationalised banks account for more than half of the agricultural loans disbursed in the state, while State Bank of India accounted for 17.3 percent as of 2017. Private sector banks accounted for 15.5 percent of total agricultural loans in the state.

Gross non performing loans in this book have been gradually rising over the past few years for all banks, the brokerage house noted in its report. “Public banks have 15 percent non performing loans in this book while private banks are at 3 percent. These issues take time to settle as we have seen in states like Maharashtra and UP where such waivers have been announced in the past,” the brokerage house wrote.

Kotak also cautioned that microfinance institutions and small finance banks that operate in the region could take a hit, even though they are not directly part of the loan waiver. In Karnataka's case, Ujjivan Financial Services and Bharat Financial have close to 11-15 percent of their loan book in this state. “These portfolios are quite quick to deteriorate,” Kotak said.

Samit Ghosh, founder and chief executive officer of Ujjivan said that the impact of farm loan waivers depends from state to state.

“While the waiver in Uttar Pradesh took a toll on MFI's including Ujjivan, in the case of Maharashtra, it was the larger issues which impacted performance. In Karnataka, possibilities of a farm loan waiver may not be a cause of concern for the company as Ujjivan's lending is largely restricted to the urban areas, with a very small percentage being lent in rural areas,” Ghosh told BloombergQuint. He, however, added that loan waivers more generally are undesirable as they have negative side effects including distorting the credit culture and incentivising willful default.

Macro Concerns

There is no shortage on warnings on the negative fallout of farm loan waivers on the broader economy. The RBI reiterated some of these concerns in a September 2017 study published as part of its Mint Street Memos series.

In it, the central bank noted that farm loan waivers can have an “enduring” impact on market borrowings.

“If overall government borrowing increases, yields on state development loans (SDL) may firm up posing higher interest burden for the states in future. Concomitantly, they can also crowd out private borrowers as the general cost of borrowing increases with pressure from higher government borrowing on the finite pool of investible resources in the economy,” said the RBI.

A higher fiscal deficit also impacts inflation adversely. The impact of fiscal deficit on inflation will be higher at higher levels of fiscal deficit and inflation, the RBI said.

The silver lining, according to Kotak Institutional Equities, is that loan waivers could decline in the future with the government introducing new crop insurance schemes.