In a big jolt to the banks, it has been learnt that the government’s decision to reimburse banks for their losses from the Rs71,680 crore farm loan waiver scheme will not cover debts already written off.

According to people in the banking industry, loans taken before 1997 and turned bad will not be covered by the waiver scheme. Besides, loans already written off by banks will not be reimbursed.

This is a very bad news for banks as recovery or reimbursement of written-off loans, adds to their profits. “The written-off accounts are very sticky and there is a very slim chance of recovering those (accounts). These bad debts are caused by the crop failures or monsoon problems and banks don’t expect to recover them,” said Abhijit Majumder, an analyst with domestic brokerage firm Prabhudas Lilladher Ltd.

Hatim Brochwala, who works as an analyst with Mumbai-based brokerage Khandwala Securities Ltd, said the decision (of not covering the written-off assets) would not affect banks’ stocks much as the market has already reacted to this. "It is a bad news for banks no doubt but I think the market already sensed it. Otherwise, the bank stocks would not have fallen so much," Brochwala said.

"The government will not provide for the written-off farm loans but only take care of the overdue loans," a general manager of a public sector bank, who did not wish to be named, said. An overdue loan is one in which the payment is due but the borrower is in no position to pay. After some time, an overdue loan becomes a non-performing asset of the bank.