Farm loan waiver: net impact on banks

Okay, the FM has given the details of the farm loan waiver package. I notice that the commercial banks' exposure in the overdues of Rs 60,000 crore is 35% or nearly Rs 21,000 crore- a lot higher than the figure of Rs 10,000 crore that papers had mentioned earlier. Cooperatives and regional rural banks account for the rest.

As for the package itself, the government will provide cash to lenders as follows:

• Rs 25,000 crore in 2008-09
• Rs 15,000 crore in 2009-10
• Rs 12,000 crore in 2010-11
• Rs 8000 crore in 2011-12

I am still not clear as to whether the Rs 60,000 crore constitutes gross NPAs or net NPAs. The figure is said to constitute "all farm overdues" in the eligible categories. That sounds like gross NPAs.

This means that banks that have made provisions can write back these provisions and make gains as a result. But, in 2008-09, they will have to write off the entire amount, including the unprovided portion. So, in 2008-09, their bottomline will take a hit in net terms. In the subsequent years, there will be gains to the bottomline as cash flows in against amounts written off.

However, if the banks are writing off Rs 60,000 crore, the compensation in present value terms is smaller than this amount. Banks will gain to the extent of provisions already written off; they will lose to the extent that the compensation is less than Rs 60,000 crore in present value terms.
It's hard to say what the net effect is. Probably a small gain, although this could vary from bank to bank. On the whole, listed bank stocks should gain.