The share price of Bharat Financial (SKS) has been sharply down in recent days over worries about the company's Q4 results performance. A significant factor here has been the massive farm loan waiver in Uttar Pradesh, where loans were waived small and marginal farmers with debts of up to Rs1 lakh, a move that is expected to cost the state government Rs 36,359 crore. Microfinance companies and NBFCs are worried about the ripple effect of this move, since this could set a precedent in the rural sector, encouraging borrowers to default. The vast majority of loans provided by MFIs are under Rs. 1 lakh.

The estimated exposure for the NBFC sector in UP is around 5-7%, or around Rs. 3,500 crore. But it may not end there - with the farm loan waiver having been a poll promise in UP, farmers in Tamil Nadu are agitating for similar waivers in the state. Maharashtra and Karnataka are also headed for polls, and political parties, having seen the success of such poll promises in UP, are being encouraged to deliver such promises in these states. This is a blow to what is a growing rural-lending sector and hurting the growth of companies like Bharat Financial. With farmers now expecting loan waivers in these states, Bharat Financial and others are reportedly already witnessing rising loan defaults in their balance sheets. 

State finances are already under pressure, and moves like this take funds meant for development and allocate it to short-term relief like loan waivers. While the Central government has been pushing for deeper agricultural reforms such as AMC reform and efforts that would enable crop diversity and boost the health of small and marginal farmers, states are doing little for farmers beyond such waiver schemes.