Poor Harvest

Written by The Financial Express | Updated: Jun 6 2014, 07:22am hrs
Fresh from poll victories, Telangana chief minister K Chandrasekhar Rao and Chandrababu Naidu who is chief minister-designate for the residual state of Andhra Pradesh are headed down the same slippery path. Both have announced staggering waivers for loans taken by farmers in their respective states. In Telangana, crop loans of 23 lakh farmers, totalling R12,000 crore, are likely to be waived. Given the size of the states budget is a mere R90,000 crore, it is not clear how the money is going to be metpresumably, the state is looking at being able to issue bonds to the banks who have lent money to the farmers. A similar exercise is to be followed in Andhra Pradesh and, given his status as a BJP ally, presumably Naidu is looking for some help as well. One way would be to get some relief by way of the value of bonds the states can issue; another is to petition the Finance Commission for specific relief. Both states have also sought special category status, as well as more central assistance.

While state-owned banks will probably have no option but to accept the waivers, there is a larger issue that the central government needs to keep in mind, that of the impact this has on the overall NPAs of banks. Once loans are waived, there is a tendency of other borrowers to not pay, waiting for the next big loan waiver to be announced. Which is why, of the loans extended by banks, the proportion of NPAs is among the highest for the agriculture sector for several banks.