Farm loan waivers may cost Rs 1.5-2.3 trillion to banks : Report

These farm loan waivers could be funded by debt issuance rather than expenditure cuts and these debt issuance spread over 3-4 years may keep states borrowing costs under check.

New Delhi, Jun 22: If more states announced farm loan waiver schemes in coming days, the banks will have to bear the brunt of write-down up to Rs 1.5- 2.3 trillion, says research report by Edelweiss Research.

So far, Maharashtra and UP have waived nearly 30-40 per cent of outstanding agri-bank credit, while for Punjab it was 15 per cent, according to the report. In the meanwhile, Karnataka has also announced farm loan waiver scheme.

There is high probability that more states like Madhya Pradesh, Gujarat, Rajasthan, Haryana, may join the bandwagon, Edelweiss Research said in a note, adding "if this plays out and assuming 20-30 per cent of outstanding agri-bank loans are waived, the total loan waiver could add up to a sizeable around Rs 1.5-2.3 trillion (1.0-1.5 per cent of 2017-18 GDP)".

These farm loan waivers could be funded by debt issuance rather than expenditure cuts and these debt issuance spread over 3-4 years may keep states borrowing costs under check. However, banks, which will be compensated only over a period of time, will have to bear the brunt. Moreover, deterioration in credit culture is an added potential risk for banks.

The report further said if the government staggers the fiscal burden over 3-4 years, it will still imply annual fiscal cost of 0.3-0.5 per cent of GSDP. RBI's monetary stance will be critical, Edelweiss said, adding it should remain accommodative given the state of the economy.

Earlier this month, the RBI left key interest rate unchanged as it wanted to be more sure that inflation will stay subdued. However, the finance ministry's stand is that inflation has been consistently low, warranting a rate cut.

PTI