The rising NPAs and waivers in these sectors, there is bound to be a marked decline in lending to them too with severe impact on business and economic growth
As 2018 draws to a close, as much as Rs 1.47 lakh crore of farm loans are outstanding in Madhya Pradesh, Rajasthan and Chhattisgarh, which have announced waivers, according to government data. If banks don’t get repayment of loans, where will funds come from to lend the next cycle? said a banking official, pointing that states going in for the loan waivers do not make an upfront payment of the total loans due. It may take up to 5 years.
Former Chief Economic Adviser Arvind Subramanian said last year that the waivers already announced and those yet to come would shave 0.7 per cent off the gross domestic product and have a deflationary impact on the economy. Farm NPAs usually rise sharply soon after a loan waiver is announced, as farmers stop repayments. As if farm loan waivers of a magnitude of over Rs 1.5 lakh crore by various states have not done enough economic damage, Congress president Rahul Gandhi has threatened to force the Modi government to offer a nationwide waiver. The fact that a major national party is promising such a waiver will automatically make people stop repaying loans, thus making the bad loans problem even worse.
The worsening in the quality of MSME credit was even more severe at banks under the prompt corrective action (PCA) framework
Maharashtra, Uttar Pradesh and Punjab announced waivers in 2017, which are under implementation. Karnataka announced a waiver earlier this year. These waivers add up to Rs 80,000 crore. With these three states joining, the amount could rise to nearly Rs 2.3 lakh crore. There have been two national farm loan waivers—in 1990 and 2008. In 2014, Telangana and Andhra Pradesh announced waivers, Tamil Nadu joined in 2016. Studies have shown that the reduction in bank credit following waivers forces farmers to approach informal sector lenders, which increases indebtedness as such loans are expensive. Further, loan waivers reward defaulters and punish honest borrowers, apart from bankrupting the states’ treasuries
Bad loan in the MSMEs rose to 13.08 per cent for public sector banks (PSBs) at the end of March 2018, compared with 12.56 per cent in March 2017, according to data from the Reserve Bank of India (RBI). The outstanding loans to medium industries rose 3.3 per cent year-on-year to Rs 1.05 lakh crore. Loans to micro and small industries stood at Rs 3.64 lakh crore as on September 28, 2018.
The worsening in the quality of MSME credit was even more severe at banks under the prompt corrective action (PCA) framework. For these lenders, NPAs arising from the MSME portfolio stood at 15.74% at the end of March 2018, about a150 basis points higher than the level a year before that, documents reviewed by Financial Express showed.
All this is really a matter for concern. Banking relationship grows out of mutual trust and understanding. Loans are extended largely based on the credibility of the borrower, among others. But the credibility of borrowers everywhere is getting eroded. Banks had already been wary of large value loans and have become more inclined to lend to MSME and Agriculture sectors. But now with rising NPAs and waivers in these sectors, there is bound to be a marked decline in lending to them too with severe impact on business and economic growth. Intended recapitalization of banks would prove futile.
1. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.
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