Weak agricultural output may increase demand for loan waivers and this may destroy credit culture and reduce incentives for loan disbursement, rating agency India Ratings said.
"Weak agricultural output may increase demand for loan waivers. Agriculture output in the current year is likely to be impacted by the deficient (12 percent) and unevenly distributed monsoon and the consequent delay in kharif sowing," the report said. "The impact of sub-normal rainfall will also be felt on rabi crop as water reservoirs are likely to be less than optimally filled.”
"The agriculture growth for FY15 is estimated at 1.3 percent. The weaker agriculture output could increase the demand for debt waivers, similar to the scenario in FY08-FY09," the agency said.
Debt waiver promises by incumbent governments of Andhra Pradesh and Telangana can significantly impact credit repayment culture in these two states, the report said.
India Ratings has estimated total agricultural loans in these two states at around Rs 1.4 trillion, which is about 19 percent of the country’s total agricultural loans outstanding at FY14.
The state governments’ present proposal which is a mix of complete waiver and partial credit of the loan in the borrowers’ account depending on the loan outstanding and thereby turning their accounts regular, if carried through, may mask the delinquencies for the time being.
However, it could result in significant asset quality impairment in agriculture going forward. The unintended outcome of this could reduce availability of credit to farmers from banks, forcing them to resort to unorganised sector, the rating agency said.
India Ratings believes that electoral success of these sops may have a spill-over effect. Agri borrowers may expect similar promises from political parties of the neighbouring states leading to an increase in delinquencies in those states as well.