As 6 states go to polls, farm loan waiver a risk for PSU banks: Report

Six states in India go to polls over the next year and half, and the farm loan waivers being promised could be risky proposition for public sector banks and Micro Finance Institutions (MFIs) given the fact that most of these states are agrarian, a note from the capital market company IIFL Securities said.

Farm loan waivers have been announced in the run-up to the upcoming elections, and IIFL Securities dissected data from the State Level Bankers’ Committee, or SLBC, to understand the risk factor that the banks face.

In the six states, public sector banks have a higher agricultural Gross Non-Performing Assets (GNPA) ratio of around 15 to 25 per cent than private banks (3 to 4 per cent), the report said.

The IIFL Securities report said that the total outstanding agriculture loans that the six states currently owe amounts to Rs 6.7 trillion, which is 25 per cent of agriculture loans and 3 per cent of the total system loan. The states in question have Non-Performing Assets, or NPAs, in the agricultural sector worth 5 to 19 per cent, the report added.

MFIs are under risk, too, the report pointed out, notably Small Finance Banks (SFBs) and Non-Bank Financial Companies (NBFCs). Days Past Due (DPD) data shows default of over a month surged by 140 to 300 basis points on a quarter-on-quarter basis in March this year, in states such as Kerala, Madhya Pradesh and Rajasthan, and the IIFL Securities report predicts further rise in default in the June 2024 quarter. In Bihar, the report added, lenders potentially face the risk of higher exposure. Bihar is currently seeing high growth and low overleveraging.

In India, farm loan waiver is among the most common promises political parties make in the run-up to elections, and IIFL Securities said that, in the last 10 years, these waivers have roughly created a burden of Rs 3 trillion and caused NPAs in the agricultural sector to shoot up by 30 to 85 per cent across 18 states.