BANK SHARES FALL ON FARM LOAN WAIVER IN MAHARASHTRA

Shares of banks fell up to four per cent on Monday after the Maharashtra government decided to waive off farms loans of small and marginal farmers.

Union Bank of India and Oriental Bank of Commerce were the top losers, slipping 4.5 per cent and 4.2 per cent, respectively. Canara Bank, Bank of India, Indian Bank, Allahabad Bank and Bank of Baroda were the other major losers, losing anywhere between 3.1 per cent and 3.9 per cent. The Nifty Bank index fell about one per cent to 23,470. The impact of the loan waivers will be felt more on public sector banks (PSBs) than their private sector peers.

According to a note by Kotak Institutional Equities, Maharashtra has nearly ~4.2 lakh crore of agriculture loans (comprising 23 per cent of loans) and ~1.2 lakh farm loans (seven per cent of loans) with PSBs holding nearly 52 per cent of total farm loans, followed by cooperative banks (32 per cent) and private banks (12 per cent).

On Monday, Finance Minister Arun Jaitley met PSB chiefs to take stock of their finances. He said the government was working towards consolidation of state-owned banks and the Reserve Bank of India was also in the process of preparing a list of bad loans where resolution is required under the insolvency and bankruptcy rule.

The Maharashtra government has reportedly waived off loans of small and marginal farmers with immediate effect, with these farmers being eligible for fresh loans despite being blacklisted earlier due to the overdue status of their loans.

“Frequent farm waivers create expectations of future waivers and can be serious disincentive to delay or stop loan repayments. Greater share of PSU banks in farm credit, which are considered quasi-government, increases the risk of moral hazard,” observed the Kotak report.