Farm loan waivers could weaken the credit discipline and lead to a rise in agricultural non-performing loans (NPLs), with public sector banks (PSBs) likely to be more affected than private sector peers, a note by Macquarie Group said.

The note comes after the Maharashtra government on Friday announced a farm loan waiver of up to Rs 2 lakh under the Punyashlok Ahilyadevi Holkar Shetkari Karjamafi Yojana in the budget for 2026-27. Under the scheme, farmers with outstanding crop loans as of September 30, 2025, will be eligible for the waiver.

What do analysts say?

“Farm loan waivers eventually result in higher NPLs in the agriculture space as they vitiate the credit culture,” Macquarie analyst Suresh Ganapathy said in the note. It also highlights that even borrowers who are otherwise able to repay loans may delay payments in anticipation of future waivers, creating a moral hazard.

“We had seen agri-NPL coming down over that past several years and hence this development is negative in our view.”

The impact could be more pronounced for state-owned lenders as their farm-loan portfolios tend to have a higher share of vulnerable borrowers. While all banks are required to meet priority sector lending targets — including agriculture — public sector banks typically have larger exposure to rural and farm lending.

For instance, agricultural NPLs at HDFC Bank were about 3.8% as of FY25, compared with 8.4% for State Bank of India, the note said.

Macquarie also pointed to historical evidences suggesting that farm loan waivers tend to coincide with a deterioration in asset quality in the agricultural segment. When the government of Uttar Pradesh had announced a large farm loan waiver in April 2017, agricultural NPLs at SBI rose from about 6.4% to around 9.5% within the same quarter, the note said.

Although part of the increase was linked to the recognition of stress following the merger of associate banks with SBI, the waiver announcement also contributed to a weaker repayment behaviour among borrowers.

Following the report, shares of PSBs fell on Monday. On the BSE, the SBI stock closed 3.9% lower at Rs 1,098.70 and Bank of Baroda fell 2.4% to Rs 288.15. Shares of Canara Bank and Union Bank of India closed down 3.8% and 4.8%, respectively.

Overall, the Nifty PSU Bank Index fell nearly 4%.