With Telangana set for early polls in December, banks and the agricultural ecosystem are facing the perilous prospect of impending farm-loan waiver.

The ruling Telangana Rastra Samithi (TRS) has promised a loan waiver of up to ₹1 lakh for farmers in its partial manifesto, which was released on Tuesday. The grand alliance of Opposition parties has gone a step further, with a more ambitious promise of waiving loans of up to ₹2 lakh if it comes to power.

As per preliminary estimates by officials, the expected burden on the State exchequer will be in the range of ₹22,000-40,000 crore, as approximately 40 lakh farmers would be eligible for the waiver. Even though the waiver amount is to be provided by the State government to banks, it is expected to hit the banks in many ways.

Going by the experience of previous loan waivers (after the 2014 elections), the funds were released to banks in instalments stretched over a long period of time. In Telangana, banks had to wait for three years to get the money from the government, which provided ₹16,374 crore in five tranches up to September 2017.

In AP, too, banks had to wait for more than four years for the waiver amount of ₹24,000 crore. Up to December 2017, the government had released only ₹16,000 crore to banks. The lack of Central funds was cited as a reason for the delay in reimbursement to banks. This made the already beleaguered banking system more vulnerable to a liquidity crunch.

Expecting the loan waiver, many farmers had stopped repaying loans. This will make the disbursal of rabi loans sluggish and, thereby, impact agriculture in the current season.

The overdues in agriculture for banks in Telagnana increased by ₹18,194.49 crore in the quarter ended June 2018, as per data released by the State Level Bankers’ Committee last week.

About 33 per cent of short-term crop loans outstanding are shown as overdues in the books of the banks, while overdues in terms loans are over 27 per cent. Including overdues in agricultural infrastructure and ancillary activities, overdues in total outstanding agricultural advances touch 30 per cent.

Similarly, non-performing assets (NPAs) in agricultural loans had increased by ₹4,795 crore in the quarter. While NPAs in agri term-loans crossed 12 per cent, bad loans in total agriculture advances stood at 7.70 per cent.

Poor disbursal

Disbursals have also been poor so far. While the total achievement of target in kharif advances was around 70 per cent, many individual banks had only disbursed loans ranging from 5 per cent to 40 per cent of the target. Any loan waiver could only further worsen the scenario.

Economists and the Reserve Bank of India have also been critical of loan-waiver, saying this will result in the capital expenditure by the government taking a major hit. Loan-waivers may, at best, be a short-term remedy for farmers’ distress, but cannot be regarded as a long-term solution. The only way is to augment capacity in the agri sector.