Farm loan waiver could undermine fresh lending to farmers. Agriculture loan growth could remain weak this year and a sharp slowdown in such lending could shave 1 percentage point off the banks’ system loan growth. This is because banks could refrain from lending in areas where repayments might stall until the details of the farm loan waiver and the beneficiaries are finalised, according to a report by Credit Suisse.
Past experiences corroborate the point. Andhra Pradesh and Telangana, for instance, saw a sharp dip in loan growth once they started their loan waivers. To avoid such behaviour, the Maharashtra government has instructed that only those who are continuing to repay would get a write-down on the loan. However, the farm sector loan growth has already slowed to 1% in April.
This slowdown in farm credit growth was, however, not visible in 2008-09, most likely because a bank’s priority sector lending targets are set on the previous year’s closing total loan balance. As 2007-08 was a strong growth year for bank loans, the targets for 2008-09 were set at a high level. In FY17 on the other hand, system loan growth was only 5%, and for most PSU banks, growth was zero or negative. Thus, there would be minimal regulatory pressure as well on banks to continue farm lending.
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The impact of farm loan waivers announced by states like Uttar Pradesh and Maharashtra could be staggered over a period of more than a year, if past experience is anything to go by. So the financial impact of such measures could also be spread over some years and not restricted to one fiscal, which means fiscal deficit of these states in 2017-18 may not worsen to the extent as feared. In fact, the loan waiver by the UPA government in 2008 took 2.5 years from announcement to get completed, and was eventually 27% smaller than the initial estimate of `71,700 crore, according to Credit Suisse.