Days after it reported spike in its own NPAs due to farm loan waivers, HDFC Bank today warned that lenders may discontinue fresh lending to the agriculture sector.
Days after it reported spike in its own NPAs due to farm loan waivers, HDFC Bank today warned that lenders may discontinue fresh lending to the agriculture sector.
"Banks are likely to see increase in NPAs in the agriculture sector and a general worsening of credit culture," its economists said in a note.
"Loan waivers are likely to also impact the supply of credit as fresh lending to the agriculture sector could dry up," they added.
HDFC Bank, country's second largest private sector lender, known for its asset quality, reported a 0.20 per cent jump in gross NPAs for the June quarter.
The city-headquartered bank had said up to 0.13 per cent contribution in the fresh bad loans was from the agri sector. Other lenders have also reported similar difficulties.
"With some farmers receiving loan waivers, other farmers across states, even those who are able to pay, are wilfully defaulting on loans in order to get loan waivers.
Thus resulting in a classic microeconomic problem called the moral hazard," it said.
Banks could adopt indirect credit approach like supplying credit through microfinance institutions, it said.
Strategies like staggering of waiver or converting loans into bonds are also likely to create cash flow problems, it said.
Flagging another concern, the note said unlike Uday Bonds for the power sector which focused on creating efficiencies in the system, there are no such measures in the farm loan side.
"Borrowings for farm loan waiver are unlike those that were done under the UDAY scheme - which were contingent on certain conditions that were aimed at improving DISCOMs' efficiency. Therefore, farm loan waivers are freebies that are overall negative for the credit culture and markets," it said.
Uttar Pradesh, Maharashtra, Punjab, Karnataka, Telangana and Andhra Pradesh have announced loan waivers recently.
The bank pegged the total waivers at Rs 2.3 lakh crore or 2 per cent of the GDP in FY17.
The note argued that FY09 waiver announcement had led to changes in credit allocation and increase in defaults in India with post waiver loan performance declining faster in districts with greater exposure to the program.
Only a third of the small and marginal farmers will benefit from the move as two-thirds are outside institutional finance and depend on moneylenders or relatives, it said.
Loan waivers also do not help on consumption and investment fronts, it said, citing studies done after FY09.
On crop insurance, it said insured amounts are seldom sufficient to cover the loan amounts and there is also the risk of insurance amount being used for basic necessities or funding the next sowing which does not guarantee repayments for the banks.
(This article has not been edited by DNA's editorial team and is auto-generated from an agency feed.)
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