Loan waivers leave big holes in banks' books

Signs of farm loan waiver in states like Maharashtra and Uttar Pradesh taking its toll on general repayment culture are quite noticeable now. From HDFC Bank, the country's most valuable lender, to Bandhan Bank, one of the latest entrants in the banking field, banks are facing the hit.

Bandhan Bank on Thursday said its non-performing assets rose to Rs 175 crore, which is 0.82% of its outstanding loans at the end of June, and two-thirds of it originated in Madhya Pradesh, Maharashtra and Uttar Pradesh. Its gross NPA ratio was merely 0.38 per cent a quarter back.

Uttar Pradesh's new BJP-led government announced the loan waiver scheme for 87 lakh small farmers at its first cabinet meeting in April, which was quickly followed by other BJP-led state governments in Maharashtra and Madhya Pradesh.

"When a state government announces a loan-waiver scheme, small borrowers typically stop repaying all kinds of loans, hampering the overall credit culture," Bandhan Bank managing director Chandra Shekhar Ghosh said.

Bandhan may not have substantial exposure to direct agriculture but it lends to the allied farm sector. Just a couple of days back, HDFC Bank MD Aditya Puri said agriculture is one segment which is showing the most stress because of demonetisation and farm loan waivers.

"At this point of time, there is distress, which has to be alleviated. Is there going to be some temporary impact on NPAs? Yes, I think the stressed assets will go up. But will there be a major impact? No," he said. HDFC Bank's Rs 28,000-crore agri-loan p ortfolio was one of the reasons for a rise in its sticky loans ratio to 1.24 per cent in June-end.

"It (loan waiver) undermines an honest credit culture, it impacts credit discipline, blunts incentives for future borrowers to repay , in other words, waivers engender moral hazard. It entails at the end of the day transfer from taxpayers to borrowers," RBI governor Urjit Patel had said.