Problems of the agriculture sector have started to percolate down to the banking sector. HDFC Bank, which prides itself on having the cleanest assets in the banking space, has been hit by agriculture loans. The bank managed to steer clear from the problems plaguing the industrial sector, which has affected every bank in the country but somehow could not stay out of the mess in the farming space.
In its June quarter numbers, HDFC Bank said that its gross non-performing assets (NPA) climbed from 1.05 percent in March 2017 quarter to 1.24 percent in June 2017 quarter. In absolute terms, bad loans stood at Rs 7,242 crore. Farm loans now account for 60 percent of new NPAs for HDFC Bank. The bank, however, pointed out that more than half of the increase in bad loans was from its agriculture portfolio. The bank says announcement of farm loan waivers impacted recoveries in this segment.
Announcing loan waivers in one state by various political parties led to expectations of a similar deal in other states. Farmers refused to repay loans in anticipation of their loans being waived. That is exactly what happened in the case of HDFC Bank’s agri loan borrowers.
If the dent on HDFC Bank’s books is visible, other banks are likely to suffer more. Being the most conservative of the lot, HDFC Bank has managed to keep its books clean. The impact on the more aggressive banks, especially the public sector ones, will be clear as they announce their numbers.
For the banks, the problem will be more or less over when they declare these numbers in the books. But the state governments, who came to power promising these loan waivers will be picking up the tab. It will take years for these governments to repay the cost of political audacity.
The state of Punjab has said it has set aside less than a tenth of the loan waiver amount in its current year budget. The loan waiver is expected to cost upward of Rs 20,000 crore while the state has set aside only Rs 1,500 crore. Punjab government officials have said that they intend to pay-back the loans over a period of ten years. The official has been quoted as saying that the banks should be happy with this arrangement because at least there would be some recovery of the loan.
In Uttar Pradesh, the state government’s attempt to raise bonds called Kisan Rahat Bond, to pay back the banks for the loan waiver has been rejected by the Finance Ministry. Finance Minister had earlier said that the state governments announcing loan waiver will have to pick up the tab themselves and the Centre would not help them. Punjab’s effort to get it financed by the Centre was also rejected by the Finance Ministry.
This complicates the matter further for all stake holders. States would have to divert resources from their development projects to the repayment of banks. Growth will thus take a beating. On the other hand, banks will no longer be interested in lending to the farmers who defaulted on repayment. These farmers will now have to access higher cost funds to meet their requirements.
Ironically, while the banking sectors have been affected on account of loan waivers, microfinance companies have not felt the impact. In a recent interview MR Rao, Managing Director and CEO of Bharat Financial said that recovery in Uttar Pradesh is nearly 99 percent and they have been lending in all states where the borrower has a good track record of payment. Other microfinance institutions also have a similar story to share, which proves that loan waiver was more of a political gimmick than an actual need.
There are cases where a farmer might not have been in a position to repay and would have defaulted. As in the case of UP where the actual defaults well before the loan waiver were announced was nearly 25 percent only of the total loan waiver amount.
For short-term gains, farmers who have willingly defaulted have sacrificed future gains. The politicians who have provoked them to do so have done the biggest disservice than the weather gods could have ever done.
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