State Governments Should Restructure Agricultural Loans Instead of Waivers Amid El Nino Risks: SBI ERD Report

State governments should approach banks to restructure agricultural loans rather than resorting to farm loan waivers to alleviate distress caused by the El Nino weather phenomenon, according to a report by the State Bank of India's (SBI) Economic Research Department (ERD). The report further suggests that a portion of the restructuring cost could be borne by the states.

The ERD's Rabi Climate–Credit–Production Exposure Index has identified a concentration of potential agricultural vulnerability across several states, including Madhya Pradesh, Maharashtra, West Bengal, Telangana, and Andhra Pradesh.

In absolute terms, the assessment indicates that approximately ₹43,548 crore of agricultural credit in Tamil Nadu, ₹20,256 crore in Andhra Pradesh, and ₹12,115 crore in Maharashtra is located in districts classified as highly exposed to El Nino.

To evaluate the potential impact of rainfall deficiency on agricultural production, the ERD developed a scenario-based simulation using district-level Kharif and Rabi rainfall deviations alongside agricultural production data. Estimates from the simulation suggest that combined agricultural production losses could reach approximately 3.86 crore tonnes. Of this total, Kharif losses are estimated at 0.89 crore tonnes, while Rabi losses are projected at 2.97 crore tonnes.

The report noted historical precedent, observing that the impact of two consecutive dry years in 2014 and 2015, combined with El Nino in 2018, led to the systemic level of agricultural non-performing assets (NPAs) rising to 10.1 percent in FY20, compared to 5.4 percent in FY17.

Data cited from the Fifteenth Finance Commission indicates that farm loan waiver schemes announced across Maharashtra, Karnataka, Rajasthan, Andhra Pradesh, and Tamil Nadu amounted to approximately ₹1.26 lakh crore during the 2014–18 period. Looking more broadly at the timeframe from 2014 to 2026, various states have announced farm loan waiver schemes aggregating ₹3,53,417 crore. Specifically in 2026, Maharashtra and Tamil Nadu announced farm loan waivers amounting to ₹36,585 crore and ₹2,045 crore, respectively.

"Relying on farm loan waivers as a recurring mechanism to manage weather-related distress can place significant fiscal pressure on state governments while potentially affecting credit discipline within the agricultural sector. As highlighted by the SBI research, structured debt restructuring offers a more balanced approach that helps farmers navigate climate shocks while maintaining the health of the banking system. States and financial institutions need to work collaboratively on sustainable credit management strategies to protect both rural livelihoods and financial stability." — Dr. Shishir Gupta, Founder & CEO, StartupLanes