India Braces for Surge in Populist Farm Loan Waiver Schemes
Loan waivers can also have a long lasting impact on state finances by pushing up borrowings and borrowing costs.
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With three crucial state elections concluded and a general election looming, farm loan waivers have once again become a popular policy option for politicians looking to capture the rural vote bank. A backdrop of low food prices and concerns of distress in the agrarian economy have further emboldened political leaders to call for such loan waivers, which weaken state finances and hurt banks by impacting future loan repayments.
In the past week alone, three Indian states — Assam, Chhattisgarh and Madhya Pradesh — have announced schemes to waive farm loan. They join a growing list of state governments which have resorted to such waivers in the past two years.
Since the start of 2017-18, ten states have announced farm loan waivers amounting to nearly Rs 1.7 lakh crore, shows data compiled by BloombergQuint. To be sure, the final amount of loans waived often differs from initial estimates based on the actual implementation of such schemes.
While, so far, it has been individual states that have loan waiver schemes, the calls for a nationwide waiver are also rising. Congress Chief Rahul Gandhi, on Tuesday, said that if the party is elected at the Centre in 2019, it would waive of all farm loans. Gandhi also said that he “won’t let the Prime Minister sleep” till a nationwide farm loan waiver is announced.
The last time a nationwide farm loan waiver was announced was in 2008, when the Congress-led government had waived Rs 52,260 crore in farm loans.
Farm Loan Waivers Announced in FY18 And FY19 YTD
Banks Brace for Impact
As of 26 October 2018, the outstanding credit to agriculture and allied services stood at close to Rs 10.6 lakh crore, shows RBI data on sectoral deployment of bank credit. As such, the state loan waivers announced so far account for about 16 percent of the outstanding agriculture loans.
This is already close to the proportion of loans waived at the time of the nationwide loan waiver in 2008. Back then, Rs 52,260 crore in farm loans waived were about 18 percent of the total agricultural credit portfolio, noted SBI Research in a report dated12 December.
A nationwide loan waiver scheme, if announced, would only add to the proportion of loans waived. Such schemes don’t exempt all existing dues but are usually designed in a way to waive loan accounts upto a certain amount.
When a loan waiver is announced, at first, banks see a fall in bad loans in their agricultural lending portfolio as the government makes good on overdue loans. However, it is the second order impact of such loan waivers which is more damaging. In anticipation of loan waivers continuing, borrowers are often seen defaulting on repayments even if they have the ability to pay back dues.
In a report dated 12 December, Macquarie Research noted that bad loans in State Bank of India’s agriculture loan portfolio have shot up after past loan waivers. SBI’s agriculture bad loans shot up from 6.4 percent before Uttar Pradesh announced its loan waiver to 11.4 percent as of September 2018, the research house noted.
Impact On Government Finances
The decision of state government’s to announce loan waivers will also add to the weakness in state finances.
Some of these states have already seen their fiscal deficits worsen due to the impact of the UDAY (Ujwal DISCOM Assurance Yojana) scheme, which passed on a part of the debt burden of state electricity distribution companies onto the state government. Loan waivers will add to the revenue expenditure of the states that opt for such schemes, in turn, compromising productive spending.
The Reserve Bank of India, too, has cautioned against loan waivers time and again. In a research paper in September 2017, the RBI had noted that such waivers are essentially a transfer from tax payers to borrowers.
They can also have a long lasting impact on state finances by pushing up borrowings and borrowing costs. “If overall government borrowing increases, yields on state development loans may firm up posing higher interest burden for the states in future," the study had noted.
(This was first published on BloombergQuint.)
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