Farm loan waivers will have a negative impact on bank’s asset quality, Macquarie Capital said in a note on Wednesday. States like Telangana, Jharkhand and Punjab have either announced a farm loan waiver or are mulling over it.
Macquarie is of the view that farm loan waivers create a moral hazard, vitiate the credit culture
For India largest lender, State Bank of India non-performing loans in the agriculture segment have increased sharply post the announcement and implementation of farm loan waivers.
“The issue is, while the government compensates for the farm loans, even good farmers start defaulting which then vitiates the credit culture creating a huge moral hazard,” said Suresh Ganapathy, Managing Director, Head of Financial Services Research
Macquarie Capital. “SBI’s agri NPLs have been declining steadily over the past four years. Any large waivers can see a significant change in this trend and thus we are cautious.”
Ganpathy added that he perceives a higher
impact on state-run banks than private banks since PSU banks have larger direct agriculture portfolios and larger exposure to small and marginal farmers.
“While all banks have to individually meet the 18% agriculture loan target in India, private sector banks lend to larger farmers, do more indirect lending, do portfolio buyouts or buy PSLC (priority sector lending certificates) to meet the deficit and hence have structurally lower NPLs in the segment,” he said.
For example, HDFC Bank’s FY23 agriculture non-performing loans were 3.6%, much lower than SBI‘s 11.5%.
Macquarie is maintaining a cautious stance on PSU banks due to loan waiver impact.
“Post the recent elections, there are worries that the government may veer towards populist moves in its July 2024 budget,” Ganapathy said. “Going by the past track record, the NDA government may unlikely announce an explicit farm waiver but may take the route of higher subsidy allocation, in our view. Nevertheless, it is a risk that we will closely keep an eye in the near term as it can potentially result in a sector de-rating.”
