Corporate affairs minister Sachin Pilots promiseto a farmer rally on the occasion of the 60th birth anniversary of his late fatherthat the government would not hesitate to roll out another scheme waiving farm loans if the need arose is just a hint of the kind of pressure that the finance ministry will face in the run up to the next Parliamentary elections. While such forbearance might fetch the party votes, it cannot be good for the health of the banking sector vitiating, as it does, the credit culture in the farm sector. Thats precisely what happened after the the UPA announced, in February 2008, a scheme to bail out some 36 million farmers to the tune of Rs 72,000 crore, ahead of the general elections in 2009. Non-performing loans (NPLs) in the agriculture sector rose 150% in the two years to FY11 with NPL ratios jumping from 1.9% of total loans in FY09 to 3.5% in FY11 for public sector banks, and from 1.9% to 2.4% in the case of private sector banks. That was despite two reasonably good monsoons and an increase in minimum support prices indicating that the farmers could well have repaid their loans. Indeed, in FY11, agricultural NPAs accounted for 44% of the incremental NPAs for banks. Which is why RBI Governor Duvvuri Subbarao observed that in the period 2004-12, the gross NPA ratio in agriculture was higher than the corresponding ratio in the non-agricultural sector, except during 2009 and 2010, partly due to the implementation of the agricultural debt waiver and relief scheme.
Moreover, once damaged, the credit culture is hard to repair; gross agriculture NPLs for SBI rose from 6.37% in FY11 to 9.8% at the end of the September 2012. Given the rising incidence of NPLs as also restructured assets in the banking systemtogether tipped to cross 12% of assets by March 2013another loan waiver will further hurt banks balance sheets limiting their ability to raise capital and, in the longer run, to be able to lend to farmers. In the microfinance sector, to cite a different example, when politicians decided to step in to protect small borrowers from microfinance institutions (MFI), this dealt a big blow to MFIs as repayments took a big hitin the event, as the MFIs lost out, so did borrowers who had to go back to moneylenders. Similarly, while MGNREGA payments have raised rural wages, casual evidence suggests this has reduced the creation of new farm jobs. The path to 2014 is going to be littered with many such instances.