The latest report published by Reserve bank of India revealed that waiving of farm loans has increased Non Performing assets (NPA) of Public sector Banks. The share of agriculture and allied activities in NPA has surpassed 1 trillion Rupees.
Gross NPA in PSBs amounted to INR 9.42 lakh crore at the end of July 2019 out of which INR 1.04 lakh crore belonged to agriculture and allied activities. This is 11% of the total credit. The increase in NPA was somewhat less than 20% over the last year. Agriculture Sector GNPA in June 2018 was INR 86,032 crore.
Rise in Farm Loan Waivers
According to RBI, there has been an exceptional rise in farm loan waivers since 2014-15. “The surge in loan waivers is driven by state governments. Ten states have announced loan waivers aggregating INR 2.4 lakh crore since 2014-15.”
Karnataka topped the list with the announcement of waiving of INR 44,000 crore farm loan. This was followed by Uttar Pradesh making an announcement to forgo Rs 36,000 crore farm loan. Maharashtra promised to waive loan worth Rs 34, 000 crores.
Besides, seven states (Punjab, Rajasthan, Madhya Pradesh, Chhattisgarh, Andhra Pradesh, Gujarat and Tamil Nadu) announced farm loan waivers however action is being taken intermittently.
RBI stated in its report that loan waivers are not the solution to the risks as they happen only at the time of elections. In addition, it damages the credit culture of banks and harms farmer’s interest in the long term.
Impact on NPA’s
The loan waivers allow banks to have only a part of the total outstanding loan. This turns their loans into bad debts thereby increasing NPAs. Moreover, it reduces the state’s expenditure in the agriculture sector. As result banks extend fresh loans. To avoid these circumstances, PSBs favor long term agriculture infrastructure credit instead of short term as the chance of its recovery is more.
“Loan waivers should be avoided,” said the internal working group of RBI. The government should take an integrated approach and evaluate the subsidy policies so that long term growth in agriculture sector can be achieved.