RBI's grim forecast warns against farm loan waivers

In a stern warning to states on farm loan waivers, the Reserve Bank of India (RBI) says the move has brought down banks’ agriculture lending by close to 70%, made a huge dent in bank deposits and increased bad loans of state-owned lenders by over 6% in just one year since 2017.

The latest numbers released by the RBI on trends and progress of banking in India have showed that banks’ agriculture lending growth has come down to a meagre 3.8% in 2017-18 from a high of 12.4% in 2016-17.

Since February last year when Prime Minister Narendra Modi promised a farm loan waiver for peasants of Uttar Pradesh, at least eight state governments have announced waivers of over Rs 1 lakh crore.

States that have promised farm loan waiver include Karnataka, Uttar Pradesh, Punjab, Maharashtra, Chhattisgarh and Madhya Pradesh.

The size of Karnataka’s loan waiver has been the biggest so far at Rs 46,756.61 crore, but the state has said it will do a staggered payment over five years.

According to economists, farm loan waivers not only impact the agriculture sector but also affect deposit mobilisation, banks’ operations and their non-performing assets (NPAs).

“A major reason for the fall in lending to agriculture lies in the farm loan waivers announced by different state governments over the course of this year. This has basically made banks reluctant to lend to the sector. With loans being waived, the farmers have very little incentive to pay up on any future loans they take from banks,” Vivek Kaul, economist and author of Easy Money Trilogy, told DH. The RBI balance sheet analysis showed that deposit growth of Indian banking sector had come down to a scant 6% in 2017-18 from above 10% in 2016-17, which is a five-decade low deposit growth.

This could be due to households’ savings moving in other financial assets from banks, in quest for better returns. A handsome growth in mutual funds indicates people might have preferred MFs over banks laden with NPAs and poor yields. Households account for around 60% of deposits with banks.

The latest central bank data also showed that personal loans had grown over others in 2017-18. Due to stressed loans on corporate and agriculture sectors, banks focussed more on home, vehicle and consumer durable loans.

Personal loans grew close to one and a half percentage points to 17.8% in 2017-18 compared to the previous year.