Loan waivers negative for banks, MFIs: Analysts

A farm loan waiver following the Bharatiya Janata Party’s win in Uttar Pradesh could exacerabte the issue of bad loans, particularly for public sector banks. They have higher exposure to this segment and are already struggling to stay afloat at a time of low capital, anaemic credit growth and high bad loans.

Punjab National Bank would have a big impact, given its strong exposure in the Indo-Gangetic belt; so will State Bank of India, given its scale of business, believe analysts at Kotak Institutional Equities.

It is not clear if such waivers will be implemented and if such loans will be repaid by governments. The bigger issue is that it might weaken the repayment discipline across borrowers. At Rs 65,000 crore, direct agricultural loans in UP formed 0.8 per cent of the system loans in FY16, estimate analysts. The bigger worry is that, increasingly, political parties are promising loan waivers to win state elections. Besides UP, this is visible in Karnataka, Maharashtra, etc, gearing up for state elections within the next two years.

“Loan waivers can become a national issue, particularly for the 2019 general election,” says Parag Jariwala, banking and financial services analyst at Religare Capital Markets. Analysts believe if these become the new norm, banks could resort to measures such as cautious lending and higher interest rates. These would provide support for asset quality but also lead to lower growth for most lenders.

Apart from banks, loan waivers could impair the repayment behaviour of microfinance borrowers, as they might anticipate similar waivers in their sphere. “The Reserve Bank’s special relaxation of 60 days for NPA (non-performing asset) recognition was earlier misunderstood as a loan waiver scheme, particularly in UP,” says Jariwala. This could have a bearing on microfinance lenders, too.