Maharashtra, in its latest Budget, announced that crop loans of up to Rs 2 lakh will be waived off. Though this is good news for farmers, the question is how would this waiver impact the balance sheet of banks? BNP Paribas said the announcement has triggered key concerns – delay in reimbursements and weakening of repayment discipline. 

However, despite these concerns, analysts say the overall impact on banks could be limited based on past experience. Here is why.

#1. Delay in reimbursements? PSU banks may bear most of the loan waiver impact

First, banks may face a temporary financial impact because governments usually take time to reimburse lenders for waived loans. This delay can create an effective net present value (NPV) loss for banks, which may require additional provisioning.

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BNP Paribas noted that crop loans are largely held by public sector banks (PSUs) and cooperative banks, whose repayment track records have historically been weak. As a result, the financial hit from loan waivers may not be significantly higher than the credit costs banks already face in normal circumstances, hinting that it might be helpful for the PSU only.

#2. Repayment discipline concerns, but incentive seen as positive

Second, frequent loan waiver schemes can weaken repayment discipline among borrowers. Analysts say such measures could affect the repayment culture in rural credit products, including microfinance loans, tractor financing and rural housing loans.

They added that the Rs 50,000 incentive announced by the Maharashtra government for farmers who repay loans regularly will encourage better repayment behaviour.

#3. Loan waiver trend may spread across states

Third, markets fear that such policies may spread across states. Loan waivers often become politically competitive measures, with other states adopting similar schemes. They noted that Bihar has already announced a similar move recently.

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On this concern, BNP Paribas again reiterated that many regions already struggle with low recovery rates in agricultural lending.

PSU banks more exposed to policy-driven risks

BNP Paribas said that the business model of PSU banks remains more vulnerable to policy-driven social obligations. Such obligations can lead to earnings volatility because PSU banks already operate with a relatively lower return on assets and higher leverage.

By contrast, private sector banks have limited exposure to such risks and continue to show stronger profitability.

BNP Paribas also said the valuation gap between public- and private-sector banks also supports their preference for private lenders.

They noted that large private banks are currently trading below their long-term valuation averages, while PSU banks are still trading above their historical levels based on consensus estimates.

Conclusion

PSU Banks are relatively more exposed to these Government schemes than private banks.  BNP Paribas believes that as a result of this they would prefer HDFC Bank, ICICI Bank and Axis Bank as their top banking picks. However, they maintain a neutral stance on the State Bank of India.

Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.