Banks expect to benefit from the government's move to waive a total of Rs60,000 crore in loans to small farmers as the government would compensate them.

The government's move could in fact help banks cut down on bad loans, which will bolster interest income and reduce provisioning for bad assets, bankers say.

"It (Rs60,000 crore) may or may not come back to the banking system. We have to pay for the liquidity to the banking system over a period of three years in which we would have recovered (the loans) to the extent being written off," finance minister P Chidambaram said in his post-Budget briefing.

The budget has proposed to waive agricultural loans given by scheduled commercial banks, regional rural banks and cooperative credit institutions up to 31 March 2007 and due for 31 December that year to address the problem of rural indebtedness.

"It (package) does impose on the system a very large burden. But if you shun instant analysis, you will find that what we have strengthened the system rather than weakening it," Chidambaram said, adding, the banking system would have weakened if Rs60,000 crore had remained unpaid or overdue.

"If we can find a way to write off these loans, providing this money to the banking system, the banking system will have additional Rs60,000 crore to lend, then it will have multiplier effect and stimulate the economy," the finance minister said.

Prime minister Manmohan Singh also welcomed the move to waive agricultural loans, saying it was a "very unorthodox response" to raise the depressed "animal spirits" of the farmers, the "biggest businessmen" of the country.

The banks also hope to garner more business by opening new branches for minority financing, as proposed by the finance minister.

They see an opportunity for mobilising low-cost deposits, and thereby maintaining a healthy margin after lending at market rates.

Bank stocks, however, fell after the budget was presented in Parliament.