Delinquencies on tractor loans could rise in several Indian states as a result of political pressure for farmers to be granted waivers on agricultural loans, Fitch Ratings has said.
"Media reports that farmers' loans may be waived are likely to create moral hazard and credit discipline issues, given that there will be an incentive for farmers to skip loan repayments pending greater clarity on the potential policy," it said.
The newly elected Uttar Pradesh (UP) state government has already announced farm loan waivers, with a cap of Rs 1 lakh per farmer, for small and marginal farmers. Tractor loans were not included, but farmers may expect this position to change in future announcements. Moreover, there is a lack of clarity over whether tractor loans will be included in potential loan-waiver programmes in Maharashtra, Punjab and Haryana. These four states account for around 30% of India's population.
"We would expect the delinquency rate on agricultural loans to take several months to return to normal following the announcement of policy details. The crop season is currently in its harvesting period in most parts of India, a time when most farmers earn the bulk of their income," Fitch said.
"If the farmers postpone loan repayments and use the money earned elsewhere, it could take at least until the next harvest in six months' time to cure delinquencies," it said.
"The introduction of government support might help cure delinquencies faster, but only if state governments compensate lenders quickly, which is unlikely given the usually slow workings of state bureaucracy," the agency stated.
"A compensation timeline for UP state's farm loan-waiver programme is yet to be announced. Servicers' effective collection practices and customer-education programmes could, however, help to contain the potential rise in delinquencies," it said.