New Delhi: With more states announcing farm loan waiver schemes, a research report on Thursday said if the trend continues the total write-down could add up to Rs1.5- 2.3 trillion, and banks will bear the brunt.

So far, Maharashtra and Uttar Pradesh have waived nearly 30-40% of outstanding agri-bank credit, while for Punjab it was 15%, 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% of outstanding agri-bank loans are waived, the total loan waiver could add up to a sizeable around Rs1.5-2.3 trillion (1.0-1.5% 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% 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.

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