The Uttar Pradesh (UP) government could leave a gaping monetary hole in banks if it goes ahead with its promise of loan waivers to farmers. A report by the State Bank of India (SBI) stated that banks could take a hit of Rs.27,419 crore if this happens.
The BJP, which formed the government in Uttar Pradesh had promised loan waivers for farmers in its election manifesto, which it might now have to fulfil. According to the SBI, Uttar Pradesh has an outstanding credit of Rs.86,241.20 crore in the agriculture sector. The average loan amount is around Rs.1.34 lakh. A report by the RBI stated that marginal and small farmers received around 31 per cent of this outstanding credit. SBI took this as a proxy to come up with an amount of Rs.27,419 crore as the debt currently owed by them.
The government will feel a pinch in its revenue if it goes ahead with the loan waiver. According to SBI, Uttar Pradesh’s revenue for FY2017 is Rs.3,40,255.24 crore. Waiver of these loans would mean the government will have to compensate banks for the amount. This equates to nearly 8% of the revenue, which the government might find hard to regenerate.
40 per cent of UP households are engaged in cultivation, according to the Socio-Economic and Caste Census of 2011.
In addition to the BJP in UP, the Congress’s manifesto for Punjab also promised a loan waiver for small and marginal farmers.
Public sector banks have been under pressure of late, with their non-performing assets increasing to Rs.6.06 lakh crore in the period between April and December last year. A waiver of this magnitude could adversely impact the banking industry.