The farm loan waiver for farmers that has been raised by almost 20 per cent to Rs 71,600 crore today, will impact, among many other things, the books of public sector banks (PSB).
“The loan waiver will help us clean our balance sheets,” said Prakash P Mallya, chairman and managing director, Vijaya bank. “This amount that government is paying would otherwise have been NPAs (non performing assets) for banks.”
However, this does not reflect in share price movement. Since February 29, when the first announcement came the BSE Bankex has lost 19 per cent against the Sensex fall of 5.3 per cent. “The scheme announced by government has created a moral hazard as it does not cover all agricultural loans,” said Abhishek Agarwal, banking analyst, Religare Securities. “This might lead to indiscipline among the farmers not covered under the scheme which might lead to more defaults.
As a result, the market is generally skeptical about PSEs, largely due to the possibility of “deterioration in asset quality, subdued credit growth and high inflationary pressure,” Agarwal added.
On their part, banks are happy with the move and expect NPAs to reduce, though they are not clear about the mode of payment that the government adopts to pay them. “The government has yet not clarified on the mode of payment to the us,” said K Raghuraman, executive director, Punjab National Bank. It is expected to come to us shortly, added Mallya.