Farmers in Madhya Pradesh, Rajasthan and Chhattisgarh -- where the Congress came to power following the just-concluded assembly elections -- got the farm loan waiver as promised by the party during its poll campaign. But will it prove to be a relief, both in the long- and short-term, for farmers in these three states?

Well, in the coming days, the waived loans are going to have two negative impacts -- reduced availability of loan in future for farmers and mounting bank NPAs.

Waiver to cause lending freeze and bank NPAs

Madhya Pradesh has announced waiver for loans up to Rs 2 lakh covering about 35 lakh farmers. Chhattisgarh loan waiver is likely to cost Rs 6,100 crore and will benefit 16 lakh farmers. In Rajasthan, it will cost Rs 18,000 crore and benefit 30 lakh farmers.

Status of bank loans

As per the table (above), the total exposure of banks to farmers in the three states in the form of loans (as of March 31, 2018) was Rs 1,47,000 crore. This means, in the three states, the outstanding amount of crop loan, as on March 31, 2018, stood at Rs 1.47 lakh crore.

Now, due to the loan waiver, banks are unlikely to get repayments for a substantial part of Rs 1.47 lakh crore. Thus, their corpus for next fiscal lending to farmers would go down as banks don't have a financial margin to pump more money and they only circulate the repayments back as fresh loans.

Dwelling on the current situation, a senior bank official said: "Lending by banks in the three states - Madhya Pradesh, Chhattisgarh and Rajasthan - after the waiver is likely to slow down. If banks don't get repayment of loans due to the disrupted repayment cycle, where will they get funds to lend for the next cycle? Then farm sector non-performing assets (NPAs) of banks are bound to go up."

Finance ministry sources and experts believe that the issue of bank NPAs due to farm loan waivers is not just a crisis for the present and subsequent quarter of the current fiscal but their impact will spill over to the next few years as well.

The three state governments in a hurry to fulfil a poll promise may have announced farm loan waiver but are yet to finalise the terms and conditions. Usually, the practice is that the total due amount becomes a "claim on the state government" and payments are staggered - while the states pay part of the money now, remaining payments will be spread over three-five years.

This will certainly hit the banks adversely. Borrowers have already stopped paying EMIs in the anticipation of loan waiver. As per the rules followed by most banks, "if interest and/or installment of principal remain overdue for a period of more than 90 days in case of a term loan, it automatically becomes an NPA.

The simple interpretation is that if three EMIs are not paid by the borrower, the outstanding amount turns into bank NPAs. Since the state governments will make staggered payments, the delay in money coming back to the banks will mean more NPAs.

How true is the promise of loan waiver

Loan waiver schemes in the past have proved that the total benefit of such write-offs is way lower than the announcement made which means farmers don't really benefit as much as promised.

In 2008, the UPA government announced nationwide farm waiver of over Rs 70,000 crore. But after four years the actual amount of loans waived was just Rs 52,000 crore, which is Rs 18,000 crore lesser than the promise.

In Karnataka, the new Kumaraswamy government announced a loan waiver of Rs 8000 crore of which only Rs 400 crore has been provided for.

Loan waivers hit state finances

Past experiences also show that loan waivers are nothing but a predictable political measure that does economic harm as the taxpayers den up paying for the borrowers. The total amount of farm loans waived in the recent past stands at a whopping Rs 2.10 lakh crore. This includes the Rs 36,000-crore write-off by Uttar Pradesh Chief Minister Yogi Adityanath in April 2017, and Rs 34,500-crore waiver by Maharashtra Chief Minister Devendra Fadnavis in June 2017.

The financial condition of all states, which have opted for the farm loan waivers, is in a precarious condition. Data shows that the total outstanding liabilities (as on March-end on 2019 Budget Estimates) as a percentage of GSDP (Gross State Domestic Product) was 41.5 per cent in case of Punjab, 33.6 per cent in Rajasthan, 26.2 per cent in Uttar Pradesh , 25.5 per cent in Madhya Pradesh and 17.5 per cent in Maharashtra.

Maharashtra has the highest debt (that includes all categories of debt) among all states amounting to Rs 4.96 lakh crore. The outstanding liability of UP and Rajasthan is over Rs 3 lakh crore while Madhya Pradesh faces an outstanding loan of Rs 2 lakh crore.

Loan waivers will only add to the burden of these states and will eventually restrict them from spending money on infrastructure building and welfare schemes, thus impacting employment opportunities and wages.

Since 2017, farm loan waivers have already put an enormous burden on state finances. Maharashtra's loan waiver of Rs 34,000 crore amounted to 1.3 per cent of GSDP. Uttar Pradesh's Rs 36,000 crore amounted to 2.7 per cent of GSDP, Punjab's Rs 10,000 crore worked out to 2.1 per cent of GSDP. Rajasthan's waiver of Rs 8,000 crore in February 2018 amounted to 0.9 per cent of GSDP.

With these sops in 2017-18, the respective states crossed the comfort threshold of 3 per cent in gross fiscal deficit (GFD) to gross domestic product (GDP) ratio.

A report by India Ratings and Research on recent farm loan waiver says that "in case the entire farm loan waiver is accounted for in the current fiscal year, it may lead to a sharp increase in debt/deficit and/or a sharp reduction in capital expenditure, adversely impacting the productive capacity/growth potential of the states in the medium term".

The report goes on to state that in the absence of either staggered payments or revenue augmentation/expenditure compression, the announced farm loan waivers could widen the fiscal deficit/GSDP of Madhya Pradesh and Chhattisgarh to 8 per cent and 4.4 per cent respectively, in FY19, as compared with the budgeted figure of 3 per cent, 3.3 per cent and 2.8 per cent respectively.