'6 states going into elections': PSU banks, these MFIs at greater risk from farm loan waivers

With six states going into elections in the next 18-months and recent fair loan waivers announced by few states, PSU banks and a handful of MFIs with exposure to the states could be at risk. The six states have outstanding agriculture loans of Rs 6.7 lakh crore already, which account for 25 per cent of system agriculture loans and 3 per cent of system loans, IIFL Securities said in a note. 

Besides, the states have an agri gross non performing asset (NPA) ratio of 5-19 per cent already, with PSU banks having significantly higher agri GNPA of 15-25 per cent in the election-bound states against 3-4 per cent for private banks, despite having similar or lower agri market share than private banks.

For example, Bank of India, Central Bank, State Bank of India, Indian Bank and Punjab National Bank (PNB) not only have higher agri market share in Jharkhand, their agri NPAs are already at 10-40 per cent. In Haryana, Union Bank, PNB, SBI, Canara Bank and Central Bank have higher agri NPA percentage and also high agri market share. In Maharashtra, Union Bank, Bank of India, SBI, Bank of Baroda and Bank of Maharashtra lead banks with high agri NPA percentage and market share. 

"There have been two pan India farm loan waivers (1990 and 2008), and 18 state farm loan waivers amounting to Rs 3 lakh crore in the last decade. We find that agri NPAs spiked by 30-85 per cent post the farm loan waiver announcements historically," IIFL Securities said.

The domestic brokearge is also cautions on MFIs in MP, Rajasthan, KL (rising delinquencies), Bihar and UP (high growth, overleveraging), where exposure is higher for Utkarsh Small Finance Bank, Fusion Finance Ltd, ESAF Small Finance Bank, L&T Finance, Muthoot Microfin and Spandana Sphoorty Financial Ltd. 

"With rising 30+ DPD in March 2024 and increase in the forward flows, our NBFC analyst expects a surge in slippages from these early bucket delinquencies into NPAs in the June quarter, like in case of ESAF. Slippages could be higher for lenders having elevated exposure in MP, RJ and KL, where 30+DPD increased by 140-300 bps QoQ in March 2024," IIFL said. 

"We would also be watchful of lenders having higher exposure in BR given its runaway growth (1.5x the industry over last 2Y) and overleveraging (19 per cent customers borrowing from over 3 lenders). Spandana, Muthoot Microfin, LTF, ESAF, Fusion and Utkarsh have 36-74 per cent MFI exposure to  four states and UP (high growth as BR but lower overleveraging)," IIFL said.