Bank stocks dip on farm loan waiver

The shares of PSU banks were hammered badly after the government of Maharashtra decided to waive off farm loans of small and marginal farmers raising concern about further stress in the banking system.

Sentiments also remained subdued ahead of the release of key macroeconomic data like the consumer price inflation numbers for May and data on industrial production growth in April.

“Frequent farm waivers create expectations of future waivers and can be serious disincentive to delay or stop loan repayments. NSSO study suggests that 60 per cent of farm credit is originated by institutional sources. Greater share of PSU banks in farm credit, which are considered quasi-government, increases the risk of moral hazard,” said analysts at Kotak Securities. According to them, the lower product profitability due to higher delinquencies can lead to higher interest rates or reduction in credit availability. This has obvious risk of greater reliance on unorganised sources for incremental credit needs.

Maharashtra is the third state to announce a farm loan waiver after Punjab and Uttar Pradesh while demand for similar farm loan waiver schemes are growing in other states too. The development triggered heavy selling in bank stocks dragging the BSE Bankex by over 1 per cent in the intra-day trade. While the shares of Bank of Baroda fell 3.08 per cent, the shares of PNB and SBI dropped 2.56 per cent and 1.20 per cent respectively.

The weakness in bank stocks weighed on the broader market with the Nifty slipping below its key support level of 9,600 in the intra-day trade before ending the day at 9616.40, down 51.85 or 0.54 per cent.