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C. Shivkumar

Bangalore, June 12 Public sector bank bottom lines are expected to receive a boost this year as a result of the Union finance ministry’s farm loan waiver scheme.

Banking sources said that the scheme would help neutralise the effects of high depreciation of investments, low treasury incomes and shrinking interest margins. Bankers said that the effects of the farm loan waivers would reflect in the first quarter itself.

In fact the bottom line impact was one of the major reasons for banks’ enthusiasm for the farm loan waiver scheme.

Bankers said that the waivers would allow the banks to write back provisions on all the overdue loans, classified as sub-standard or doubt full assetsBankers said that several banks had already provisioned the over due payments as mandated by the Reserve Bank of India (RBI).

The provisions written back would be accounted as extraordinary or other income in the bank’s profit and loss account, they said.

Besides, the bankers said the government payouts in lieu of the waivers would be treated as part of the capital account.

This, in turn, would imply that public sector banks capital-to risk-weighted asset ratios would also improve from the current average of about 11.5 per cent.

The bankers said, however part of the subsidy payments, were likely to come in the form of bonds. Many of them had suggested that the bond component of the payouts be treated as part of the Statutory Liquidity Ratio.

Moreover, bankers said, the farm loan write-off would also entitle the banks to extend fresh credit to the farmers, as the charges on the collateral would be released.

What also made the farm loans attractive was the high level of collateralisationThe fresh loans would be brought under farm insurance cover of the Agricultural Insurance Corporation of India.

In the past, many banks had not taken insurance cover for loans. This risk cover would prevent farm loans from turning into NPAs in the event of crop failures.

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Loan waiver to lift banks’ bottomline

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