Banking stocks led Monday's market decline with Bank Nifty falling 3.1% - its steepest single-day drop since April 2025 - after Maharashtra's farm loan waiver announcement triggered widespread selling. According to The Economic Times, the Bank Nifty tumbled as much as 4.3% during Monday's session before closing 3.1% lower, compared with a 1.7% decline in the benchmark Nifty. All 14 constituents of the Bank Nifty ended lower, with Union Bank of India dragging the index down 4.7%. IDFC First Bank and Federal Bank fell about 4.5% each, while IndusInd Bank dropped 4.1%. Canara Bank and State Bank of India declined more than 3.5% each. The Nifty PSU Bank index dropped nearly 4%, while the Nifty Private Bank index fell 2.8%. As per The Economic Times, losses were sharper among state-run lenders which have higher exposure to agricultural loans.
The Maharashtra government has announced a ₹35,000 crore loan waiver benefiting nearly 30 lakh farmers, including incentives for non-defaulters. According to reports from The Economic Times, Maharashtra Chief Minister Devendra Fadnavis announced a farm loan waiver of up to ₹2 lakh for eligible farmers, along with a focus on infrastructure spending in the state budget. Under the Punyashlok Ahilyadevi Farm Loan Waiver Scheme, farmers with loans pending up to ₹2 lakh as of September 30, 2025, will receive a waiver. Farmers who have regularly repaid their loans will receive an "incentive benefit" of up to ₹50,000, the chief minister said. The decision is estimated to benefit 5 million farmers that have outstanding crop loan dues up to September 30, 2025. As per Express News, the state has collected information about around 30 lakh farmers, including 20 lakh non-defaulters, which will impose a heavy burden on the state exchequer. The state has more than 1.6 crore farmers in total, making this a significant fiscal commitment.
Suresh Ganapathy, head financial services research at Macquarie Capital Securities, warned that such farm loan waivers eventually result in higher NPAs (non-performing assets) in the agriculture space. As reported by The Economic Times, Christy Mathai, fund manager at Quantum Mutual Fund, said "The sell-off in banking stocks has intensified in the past couple of sessions after the Maharashtra government waived off loans of farmers with outstanding dues of up to ₹2 lakh." Since PSU banks have higher exposure to agricultural loans, the fall is sharper in this segment. According to an SBI research report, since 2014, of approximately 3.7 crore eligible farmers, only around 50% received the loan waiver amount by March 2022. The deterioration in credit culture is evident from the high level of gross non-performing assets, with NPAs in agriculture standing at 8.44% as of March 31, 2019. Agriculture linked gross NPAs in Maharashtra are high at around 17% for PSU Banks, according to Nitin Aggarwal, analyst at Motilal Oswal.
The banking sector decline was compounded by foreign investor selling, with persistent foreign investor selling also weighing on private sector lenders. As per The Economic Times, Mathai said persistent foreign investor selling has also weighed on private sector lenders. "The top holdings in foreign portfolios are large private banks, and in uncertain times investors typically sell the more liquid names rather than illiquid ones," he explained. Banks, which carry the highest weight on benchmark indices, tend to bear the brunt of broad foreign selling in Indian markets. The move follows a recent bill tabled by the Bihar government to impose caps on micro finance borrowers. According to Express News, former RBI Governors have also criticised the policy - Raghuram Rajan stated that "the flows to farmers are best affected by waiving loans" and Urjit Patel said "it undermines an honest credit culture". The RBI's internal working group report estimated that about a third of the overall fiscal slippage of 13 basis points in revenue expenditure during 2017-18 may be attributed to loan waivers.
Maharashtra is not an outlier in the increasing trend of loan waivers across India. As per Express News, after two nationwide waivers initiated by the Central government since 1990, farm loan waivers have seen an unprecedented increase since 2014-15, driven by announcements from state governments. Central and state governments have spent a whopping ₹3 lakh crore in the last 35 years towards various farm loan waiver schemes. The RBI working group report noted that eight out of ten loan waiver announcements since 2014 were made within 90 days of their respective states' election results. The impact of loan waivers on states' Budgets is typically staggered over three to five years, with the impact varying widely across states, ranging from 0.1% of the GSDP in Andhra Pradesh and Tamil Nadu to 1.8% of the GSDP in Chhattisgarh in 2018-19. The SBI report concluded that "farm loan waiver is not the solution for this problem. We need to increase farmers' income" and pitched for income support schemes instead.